Opinion ID: 2518331
Heading Depth: 2
Heading Rank: 3

Heading: Did the District Court Err in Dismissing the Weicks' Claims for Breach of Contract?

Text: The Weicks alleged in their counterclaim that the Watsons had violated several provisions of the Agreement. 1. Taxes allegedly owing to the state of Montana. In Paragraph 1(h) of the Agreement, the Watsons represented that all income taxes, unemployment, social security, ... and all other taxes ... levied, assessed or imposed upon [the Watson Agency] by ... any state ... have been duly paid; and that all income reports and/or other reports required by law or regulation have been duly filed. The Weicks contend that the Watsons violated this provision because as of October 31, 2001, the Watson Agency owed taxes to the state of Montana in the sum of $678.16. The Watsons' claim regarding the Montana tax liability is based upon a letter from the Montana Department of Revenue dated September 1, 2003. That letter shows sums allegedly due since March 31, 1999. The district court did not address this claim in its order granting summary judgment, undoubtedly because this issue is not raised in the Weicks' counterclaim. They apparently discovered this claim after they filed their counterclaim, but they did not amend their counterclaim to include it. Because the Weicks did not amend their counterclaim to include this claim, the district court did not err in failing to consider it. See VanVooren v. Astin, No. 30628, 111 P.3d 125 (Idaho March 30, 2005). 2. Failure to make 401(k) contributions. In Paragraph 5( l ) of the Agreement, the Watsons agreed that, at the time of closing, to the best of Watson's knowledge, the Watson Agency has complied with all obligations owed to employee benefit plans. In their counterclaim, the Weicks alleged that the Watsons violated this provision by failing to have the Watson Agency make the 401(k) contributions for its employees. In support of this claim, the Weicks presented an affidavit from a certified public accountant stating that the Watson Agency owed 401(k) contributions for the third quarter of 2001 in the sum of $18,605.53 and for two-thirds of the fourth quarter in the sum of $16,167.33. The district court held that the Weicks failed to show any damage resulting from this breach of the Agreement. We agree. The Weicks contend that the Watson Agency was worth less than what they bargained for because of the failure to make the 401(k) contributions during the last two quarters of 2001. The Agreement executed on October 31, 2001, fixed the purchase price for the Watson Agency. The Watsons did not represent or warrant that all 401(k) contributions had been made as of that date. In addition, the Agreement did not contain any provision requiring an adjustment to the purchase price based upon subsequent events, such as the failure to pay the 401(k) contributions. Had the Watsons been required to pay the contributions personally, then their failure to do so would have damaged the Watson Agency. They were not personally obligated to make those payments, however. It was an obligation of the corporation. Although the value of the corporation is affected by the existence of that liability, it is not affected by the timing of when that liability is paid. There is no contention that the Agency incurred any interest or penalty for the failure to pay the contributions timely. 3. Failure to pay payroll taxes. In Paragraph 5( l ) of the Agreement, the Watsons agreed that, at the time of closing, to the best of Watson's knowledge, the Watson Agency has complied with all federal and state requirements with respect to [its] employees. In their counterclaim, the Weicks alleged that the Watson Agency had not paid payroll taxes as of the date of closing. It is undisputed that the Watson Agency did not pay its payroll taxes due on December 10, 2001 (for the period of November 16 through 30) and on December 25, 2001 (for the period of December 1 through 15) [3] . The district court held that because the Weicks became the sole officers, directors, and shareholders of the Watson Agency on November 28, 2001, the Watsons were not liable for the Agency's failure to make any payments due after that date. The district court erred in its analysis. Under the Agreement, the Watsons agreed that at the time of closing the Watson Agency will have complied with all federal and state requirements with respect to its employees. The Agreement provided that the closing would occur on October 31, 2001, but it is undisputed that the closing did not occur on that date. The parties rescheduled the closing to November 28, 2001. On that date, they appeared at the office of the closing agent and signed the documents necessary to consummate the sale. Those documents included the Watsons' resignation of their positions as officers and directors of the corporation, minutes of special meetings of the shareholders electing the Weicks as directors, and minutes of special meetings of the directors electing John Weick as president and Julie Weick as vice-president and secretary. It is not clear in the record whether any of those documents were delivered to the parties on November 28, 2001. The Agreement provided that the Watsons' resignations were to be delivered at the time of the closing. In his deposition, John Weick testified that the closing was not completed until December 15 or 17, 2001, when the bank funded his loan and that the Watsons remained in control of the Agency until the closing was completed. Regardless of whether or not the documents signed by the parties on November 28, 2001, were delivered to them on that date, in the Agreement the Watsons agreed that the Watson Agency will have complied with all federal and state requirements with respect to its employees at the time of closing. Because there was evidence in the record that the closing was not completed until December 15 or 17, 2001, the district court erred in granting summary judgment on the basis that the minutes reflecting the election of the Weicks as directors and officers of the corporation were dated November 28, 2001. We therefore reverse the grant of summary judgment on this claim. [4] 4. Substantial change in the financial condition of the Watson Agency. The Agreement contained two provisions regarding any change in the financial condition of the Watson Agency. In Paragraph 2(a) the Watsons represented and warranted that when the Agreement was signed on October 31, 2001, there has been no Substantial Change in the financial condition of [the Watson Agency] since the 31st day of August, 2001. This provision then stated that any difference not in excess of $20,000 in assets or $20,000 in liabilities shall not be a substantial change, with certain exceptions not relevant to this appeal. In Paragraph 5(a) the Watsons represented that at the time of closing [t]here will be no Substantial Change in the financial condition of [the Watson Agency] as set forth in its balance sheet since the date hereof, except such as may occur in the ordinary and regular conduct of its business. This clause also included another exception not relevant to this appeal. In their counterclaim, the Weicks alleged that there had been a substantial change in the financial condition of the Watson Agency in violation of both provisions of the Agreement. Paragraphs 2(a) and 5(a) are separate provisions governing differing time periods. Paragraph 2(a) governs any substantial change from August 31 to October 31, 2001, and Paragraph 5(a) governs any substantial change from October 31, 2001, to the date of closing. The Weicks have not argued on appeal that there was a change of more than $20,000 in the total assets or liabilities of the Watson Agency during the period from August 31 to October 31, 2001. Rather, their focus on appeal is upon Paragraph 5(a). In that paragraph, the Watsons represented that from October 31, 2001, to the date of closing there will be no substantial change in the financial condition of the Watson Agency except such as may occur in the ordinary and regular conduct of its business. The Weicks rely upon the affidavit of a certified public accountant in support of the contention that such substantial change was shown. That accountant listed five items that he found to constitute a substantial change. They were: (1) a refund of $13,691.60 owing to the federal government as a result of a billing error for the period from September through November 2001; (2) the state of Montana taxes due in the sum of $678.16; (3) the unpaid 401(k) contributions in the sum of $34,772.86; (4) a loss during the period of August 31 through November 30, 2001, in the sum of $56,344.73; and (5) depreciation for the year 2001 in the sum of $31,207.92. In his deposition, however, the accountant testified that all of those changes occurred in the ordinary and regular conduct of the Agency's business. Paragraph 5(a) excludes from its provision any changes that occur in the ordinary and regular conduct of the business. Therefore, the district court did not err in holding that the Weicks had failed to present evidence showing a violation of either Paragraph 2(a) or 5(a) of the Agreement. 5. Failure to submit bidding documents to the federal government. In their counterclaim, the Weicks alleged, There were actions taken which had a material adverse affect on the business in contravention of Paragraph 2(c) of the contract in that Watson failed to submit qualifying documents which would enable the corporations to continue to bid upon contracts with the United States government. According to the Weicks, had the documents been submitted, the Watson Agency may have been placed on a list of those qualified to bid on government contracts, and had it been placed on that list it may have been permitted to submit a bid, and had it been permitted to bid it may have been awarded a contract. The Weicks did not offer any evidence regarding the chances of being placed on the list or, if that occurred, the chances of being offered an opportunity to bid. Regardless of the speculative nature of any damages, the failure to submit the required documents did not violate Paragraph 2(c) of the Agreement. Paragraph 2(c) provides, That to the best of Watson's knowledge, there has been no action taken, nor any meeting of the stockholders or Boards of Directors of [the Watson Agency], which would have a material adverse effect on the business of [the Watson Agency] except as may be contained in the minute books [the Watson Agency]. The failure to submit the documents to the federal government would not constitute action taken by the board of directors or by anyone else. The district court did not err in granting summary judgment dismissing this claim. 6. Failure to deliver all books and records of the Watson Agency. Paragraph 4(b) of the Agreement provides that at the time of closing the Watsons were to deliver to the Weicks [t]he minute book, stock certificate and transfer book, corporate seal, together with all books of account, agreements, documents and all other instruments of, or relating to, [the Watson Agency]. In their counterclaim, the Weicks alleged that the Watsons had violated that provision of the Agreement. The district court granted summary judgment dismissing that claim because the Weicks failed to show any damage caused by the alleged failure to deliver all of the books and records. On appeal, the Weicks contend that they showed damage in two ways. First, they argue, [T]he lack of records documenting expenses would impair the Weicks ability to determine the financial condition of [the Watson Agency]. They rely upon the affidavit of John Weick who stated that there was no documentation supporting numerous expenses that had been paid by the Watson Agency during 2001. The missing documentation included credit card receipts and requests by employees for expense reimbursements. He contended that without the supporting documentation for the payments, it is impossible to make an accurate determination of the financial status of the corporation. There is no contention that the records were insufficient to file an income tax return for 2001. John Weick's desire to have more detailed information about the expenses paid by the Watson Agency prior to the closing is not a element of damage recoverable for the alleged failure to turn over the records he desired. The Weicks have not pointed to any evidence that the allegedly missing documents had been retained by the Watson Agency and were in existence at the time of closing. The other alleged damage is based upon the failure to turn over correspondence that Mary Watson had with the General Services Administration (GSA) during the second half of 2001. During 2001, the Watson Agency had contracts with the GSA, and Mary Watson testified in her deposition that during the second half of 2001 there was a substantial amount of correspondence between the Watson Agency and the GSA, which should be in the GSA files. The Weicks' administrative manager stated in her affidavit that she did not find any such correspondence in the GSA files of the Watson Agency. The Weicks contend that they were damaged by the failure to turn over that correspondence because the failure of the Watsons to submit the necessary documentation to the GSA to qualify to bid on then existing contracts had a material adverse affect on the business of [the Watson Agency]. The Agreement did not require the Watsons to submit any documentation to the GSA. Their failure to do so prior to closing is in no way connected to their later alleged failure to deliver the GSA correspondence to the Weicks at closing. The district court did not err in dismissing this claim.