Opinion ID: 305865
Heading Depth: 1
Heading Rank: 1

Heading: INTERPRETATION OF PARAGRAPH 2(a).

Text: 4 The sales agreement of October 2, 1967, contained the following paragraph: 5 2. Purchase Price of Assets. 6 (a) Land, plant and equipment shall be valued at their adjusted book value on the Closing Date after allowance for depreciation and amortization, the book value thereof being subject to adjustment resulting from the allocation to said assets and the inclusion in Adjusted Book Value of the amount by which the consideration paid by Alcoa in 1959 to the former Rome Cable Corporation for its assets and business exceeded the book value of said assets, which excess has been and is being amortized at the rate of a million dollars a year. The valuation of land, plant and equipment on this basis on June 30, 1967, was $12,718,000. (emphasis supplied). 7 By the terms of this section of the agreement, Cyprus was to pay Alcoa an amount which reflected the excess consideration (as depreciated) paid by Alcoa for Old Rome's assets and business when they were initially purchased in 1959. 8 Under the 1959 purchase agreement, Alcoa had issued and delivered as payment 355,226 shares of its stock. On January 21, 1959, some three months prior to the completion of the merger between Old Rome and Alcoa, Alcoa wrote to Old Rome and offered to purchase all of its assets and business for 355,226 shares of the common stock of Alcoa. Old Rome's board of directors accepted Alcoa's offer on January 22, 1959, by countersigning Alcoa's offer of January 21. On February 17, 1959, Old Rome and Alcoa entered into a formal plan and agreement. On March 25, 1959, Old Rome's stockholders approved the sale. On March 31, 1959, the transaction was closed and the stock delivered. 9 The market value of Alcoa's stock on January 22, 1959, was $85.375 per share. On March 31, 1959, the value of a share of Alcoa stock was $80.375. The dates become critical in the determination of the consideration paid by Alcoa in 1959 to the former Rome Cable Corp. for its assets and business [in excess] of the book value of said assets. (para. 2(a) of 1967 sales agreement quoted above). 10 Cyprus and Alcoa differed, before the district court, on which date-March 31, 1959, or January 22, 1959-should be used to fix the value of the Alcoa stock delivered to Old Rome. Alcoa argued that its stock should be valued as of January 22, 1959; and Cyprus argued that the valuation should be as of the closing on March 31, 1959. The district court held that the parties, Alcoa and Cyprus, intended March 31, 1959, as the valuation date. We disagree and reverse on this issue. 11 The district court, believing the language of paragraph 2(a) sufficiently clear, rested its decision upon the words of that section alone. The district court stated: 12 In order to determine what the parties intended, it is necessary to look to the contract language. In our opinion, in using March 31, 1959, as the valuation date, Cyprus has correctly interpreted the contract. It is clear from paragraph 2(a) that 'the consideration paid by Alcoa in 1959 to the former Rome Cable Company [Old Rome]' means the actual amount, i. e. $28,551,290, paid by way of a stock transfer which took place on March 31, 1959. Therefore, March 31, 1959 is the date for the valuation of the stock . . . . Emor, Inc., supra, 325 F.Supp. at 947. (emphasis supplied). 13 This brief paragraph forms the whole of the district court's reasoning concerning the proper valuation date. 14 Cyprus argues that the district court explored the circumstances surrounding the formulation of paragraph 2(a). However, where the district court felt it necessary to examine the surrounding circumstances, due to ambiguity in the contract language, it did not hesitate to probe the incidents leading to the sales agreement. For example, on the issue of copper content discussed below, the district court devoted some twelve pages to surrounding circumstances. Additionally, although Cyprus points to several segments of the district court's opinion as indicative of the court's examination of surrounding circumstances, these segments contain discussions made by the district court in reference to other issues before it. 2 15 Since the district court rested its interpretation of paragraph 2(a) not on any demeanor evidence, but on the literal words of the paragraph, we are not bound by the clearly erroneous standard. As Judge Learned Hand noted: . . . appellate courts have untrammelled power to interpret written documents. Eddy et al. v. Prudence Bonds Corp., 165 F.2d 157, 163 (2d Cir. 1947), cert. denied sub nom, Prudence Realization Corp. v. Eddy et al., 333 U.S. 845, 68 S.Ct. 664, 92 L.Ed. 1128 (1948). See also: S. S. Silberblatt, Inc. v. Seaboard Surety Co., 417 F.2d 1043 (8th Cir. 1969); Wooddale, Inc. v. Fidelity and Deposit Co. of Maryland, 378 F.2d 627 (8th Cir. 1967). Moreover, we emphasize that we have no essential difference with the facts as found by the district court. Additionally, we note that the parties themselves differ little as to the essential facts. In these circumstances, this court is free to draw its own inferences as to the significance of the facts as they relate to the construction of paragraph 2(a). Dingman v. United States, 429 F.2d 70, 72 (8th Cir. 1970), and cases cited therein. See also: Glassman Construction Co. v. United States for Use and Benefit of Clark-Fontana Paint Co., 421 F.2d 212 (4th Cir. 1970); United States v. Winthrop, 417 F.2d 905 (5th Cir. 1969); American National Bank of Austin v. United States, 421 F.2d 442 (5th Cir. 1970). 3 16 The district court's interpretation rested on the phrase the consideration paid by Alcoa in 1959 to the former Rome Cable Company. . . . (emphasis supplied). It believed this language so strongly fixed March 31, 1959, as the valuation date that the remainder of the paragraph could be disregarded. Apparently, the court felt that consideration paid had a direct reference to the date of the physical transfer of the Alcoa stock in payment for the 1959 acquisition of Old Rome. An admission requested by Cyprus, admitted by the court under F.R.Civ.P. 36, and perhaps considered critical by it, was that: Said consideration was paid to Rome on March 31, 1959. (emphasis supplied). 17 We do not believe that the mere phrase consideration paid may in and of itself be construed as a direct reference to the date and act of physically transferring the Alcoa stock to Old Rome. PAY is a general term, usu. lacking particular connotation. . . . Webster's Third New International Dictionary, Unabridged, 1659 (1966). Indeed, courts faced with construing the meaning of paid have resorted to surrounding circumstances or other terms in the contract. United States v. Cowden Mfg. Co., 312 U.S. 34, 37, 61 S.Ct. 411, 85 L.Ed. 497 (1941); State Mut. Life Assur. Co. v. Schultz, 111 F.2d 1009, 1013 (9th Cir. 1940). 18 Although standing alone from the rest of paragraph 2(a) consideration paid is ambiguous, when read in the total context of paragraph 2(a) the ambiguity is shed. The language of paragraph 2(a), quoted below, defines excess consideration in at least three ways: 19 . . . which excess has been and is being amortized at the rate of a million dollars per year. The valuation of land, plant and equipment on this basis on June 30, 1967 was $12,718,000. (emphasis supplied). 20 First, it is that excess which has been amortized. An analysis of the facts reveals that the only excess consideration ever amortized is the figure for excess consideration reached by using the January 22nd date: $30,327,420. 4 21 Second, it is that excess consideration which, at the time of the contract, is being amortized at the rate of $1 million per year. Alcoa had initially started to amortize the excess consideration using January 21, 1959, as the date for valuation purposes. While there was some question as to whether it continued to amortize after November 20, 1959 when it changed its accounting treatment of the transaction to a pooling of interest principle, Alcoa's Vice President Hickman testified during the anti-trust action that they were charging off the 13 million dollar excess payment at the rate of one million dollars per year, and we are still doing it. In any event, the language may be readily interpreted to mean that it is being amortized at the rate of one million per year for the purpose of computation in the contract between Alcoa and Cyprus. 22 Third, it is that excess consideration which produced a valuation of land, plant and equipment on June 30, 1967, [of] $12,718,000. As the district court properly found, the figure $12,718,000 contained in the last sentence of paragraph 2(a) . . . is based on the January 22nd valuation date instead of March 31, 1959. . . . Emor, Inc., supra, 325 F.Supp. at 947. 23 Thus, the remainder of paragraph 2(a) points to the conclusion that January 22nd was the valuation date intended by the parties and not the date of the physical transfer of the property. Perhaps the most telling point is the specific figure used in the last sentence of paragraph 2(a). The district court, however, dismissed this figure as simply inaccurate because of its prior conclusion that excess consideration was based upon the valuation date of March 31, 1959. 24 Even were we to assume, arguendo, that the valuation date by which the parties intended to value the excess consideration specified in paragraph 2(a) is not defined clearly, our analysis would nevertheless compel the conclusion that January 22nd was the date which this court should utilize in reaching a valuation of excess consideration. 5 25 Assuming that the date is ambiguous, the formula presented in paragraph 2(a), however, is exact. Taking the allegations of the parties at face value, both Cyprus and Alcoa knew and assumed that the value had been established on the basis of a specific date. However, Cyprus argues that it had a date in mind which was different from Alcoa's. 26 Contract law has developed rules to deal with such latent ambiguities: 27 . . . the meaning given to the words by one party should be given effect if the other party knew or had reason to know that it was in fact so given. If the words of the contract are to be attributed to both parties alike, in equal degree, it can not in advance be determined which party's meaning should be made effective. It is then necessary to determine whether either party knew or had reason to know the meaning that was actually given to the words by the other party. (footnotes omitted) 28 3 Corbin, On Contracts, Sec. 537, at 51-42 (1960). 29 This rule has been stated in a variety of contexts, in many cases. For example, in Perry and Wallis, Inc. v. United States, 427 F.2d 722, 725, 192 Ct.Cl. 310 (1970), the court said: 30 A party who willingly and without protest enters into a contract with knowledge of the other party's interpretation of it is bound by such interpretation and cannot later claim that it thought something else was meant. (citations omitted.) 31 Equally apt is the language in Cresswell v. United States, 146 Ct.Cl. 119, 173 F.Supp. 805, 811 (1959): 32 If one party to a contract knows the meaning that the other intended to convey by his words, then he is bound by that meaning. The same is true if he had reason to know what the other party intended. . . . (citations omitted.) 33 As the preceding language makes clear, it is not necessary that the party actually know the other party's intent; it is enough that he had reason to know. 34 These rules of contract interpretation are the rules also applied in Pennsylvania. Koplin v. Franklin Fire Ins. Co., 160 Pa.Super. 182, 50 A.2d 746 (1947); cf. Logan v. Wiley, 357 Pa. 547, 55 A.2d 366 (1947); Safe Deposit & Trust Co. of Pittsburgh et al. v. Bovaird and Seyfang Mfg. Co., 229 Pa. 295, 78 A. 268 (1910). 35 In the instant case, the district court found that Alcoa had . . . consistently used January 22, 1959 as the valuation date. Among the many factors leading to this conclusion, were, as the district court noted: 36 The propriety of Alcoa in using the January 22nd valuation date cannot be questioned in paying Federal Stock Issuance and Transfer Taxes; in complying with Sec. 603 of the Pennsylvania Business Law; in advising Old Rome stockholders that the 355,226 shares of Alcoa common stock to be paid by Alcoa would be valued as of January 22, 1959; in listing the 355,226 additional shares as of January 22nd with the New York Stock Exchange; and in evidencing that date in 1965 and 1966 divestiture proceedings in the District Court for the Northern District of New York. Emor, Inc., supra, 325 F.Supp. at 946. 37 The district court found as a fact that Cyprus had knowledge or the means of knowledge that Alcoa intended January 22nd as the valuation date. The district court noted that: 38 The method and amount by which the excess consideration had been calculated by Alcoa had been presented in the divestiture hearing, and the unamortized amount of such excess consideration as of December 31, 1964, had been included by Judge Brennan in the amount of adjusted book value as of the date set forth in the Final Judgment. Without doubt, Cyprus had the knowledge or the means of knowledge of the method and amount so calculated prior to August 25, 1967 when it executed the Sales Agreement. The April 30, 1967 calculation specifically disclosed $5,562,000 as unamortized purchase premium. Emor, Inc., supra, at 948-949. (Citations to exhibits and transcripts omitted; emphasis supplied). 39 A review of the evidence confirms the correctness of the district court's findings. To give but one example, on August 4, 1967, a mere twenty days before Cyprus sent the executed sales agreement to Alcoa, Leon Hickman, executive vice president of Alcoa, wrote to W. E. Hosken, vice president of the Cyprus Mines Corporation. This letter included a calculation of the minimum price for which the company is being held. Included therein, was a figure for adjusted book value of $12,718,000, based on the January 22, 1959, valuation date. This figure was as of June 30, 1967. Indeed, in the draft report and the formal report of the planning department of Cyprus dated August 7, 1967 prepared by Cyprus to determine whether it wished to consummate the sale, it unequivocally acknowledged its understanding that Alcoa was using the January date. 6 40 In contradistinction, no evidence suggests that Alcoa knew or should have known, that Cyprus believed that March 31 was the date intended by the terms of paragraph 2(a). Indeed, no evidence was presented that Cyprus, in conversations or communications with Alcoa, ever deviated from Alcoa's assumption of January 22nd. In any event, it appears that Cyprus had not attempted to dispute the reasonable inference that it knew that Alcoa considered January 22nd as the valuation date. 41 As we view it, the findings of the trial judge indicate that Cyprus, fully aware of Alcoa's use of the January date for stock valuation purposes in the negotiations and proposed sales agreement, willingly entered into the contract. Cyprus knew or had reason to know the meaning that was actually given to the words by the other party Corbin, id., before signing the contract. It neither protested nor otherwise expressed any disagreement with Alcoa. It may not now claim after harvesting the fruits of the agreement that it thought something else was intended. 42 Cyprus contends that Alcoa stated an excessive sum for the unamortized excess consideration paid to Old Rome in 1959. Its argument is ingeniously built upon the hollow premise that at the time of the purchase of Old Rome's assets and business in 1959 by Alcoa the parties had erroneously computed the value of Alcoa's stock on the basis of its price on January 22, 1959, instead of March 31, 1959. In support of the proposition, Cyprus has vigorously argued that excess consideration paid by Alcoa could not have been based on the value of its stock on January 22, 1959 since the transaction was subject to the approval of Old Rome's shareholders, an approval not forthcoming until March 25, 1959. Moreover, it asserts that the formal plan and agreement between the parties was not completed until February 17, 1959; and all of its conditions were not satisfied until March 31, 1959, when the exchange of Old Rome's assets and business was consummated for Alcoa's capital stock. 43 Whether Alcoa and Old Rome made an erroneous calculation of the value of Alcoa's stock in the 1959 transaction, and we are convinced that they did not, is irrelevant in the construction of paragraph 2(a) in the 1967 sales agreement with Cyprus. The only question presented by the agreement is whether it states the amount of the excess consideration agreed to by the parties in the 1959 transaction. In any inquiry to ascertain the consideration ultimately paid one would expect that the records of the transaction by the parties involved would be crucial. This is especially true in an acquisition involving a sale and exchange for capital stock, one of great magnitude and complexity, predicated upon considerable preliminary negotiations, compliance with legal formalities, shareholders approval, registration with the Securities Exchange Commission and listing of the stock with the New York Stock Exchange. The parties to a sophisticated transaction of this nature of course contemplated that the shares of stock of one of America's largest corporations, stock actively traded on the New York Stock Exchange, would probably not have the same value on the date of closing as it did on the date of the offer some three months earlier. In any event, what is important to us in our inquiry is how Alcoa and Old Rome, the actual parties to the transaction, dealt with the excess consideration. Old Rome's and Alcoa's records of their transaction, without evidence to the contrary, should be conclusive in this regard. 44 The records of Alcoa and Old Rome are certain and unequivocal. They show the amount of excess consideration recorded as $13,645,078. This was the figure submitted in the preparation of the proxy statement issued in early March of 1959 to Old Rome's stockholders. It was the figure ascertained, determined and recommended by Lybrand, Ross Bros. and Montgomery (Lybrand), certified public accountants and auditors for both Alcoa and Old Rome at the time. It was the sum approved by the board of Old Rome, approved by Rome's shareholders and recorded on Old Rome's trial balance sheet as of March 31, 1959, as an asset in the nature of Excess acquisition cost. It was obviously computed on the basis of the value of the stock on January 22, 1959 of $85.375 per share. It is the excess consideration which the parties accepted and utilized in the transaction. In this respect, as the trial judge noted, Alcoa consistently, throughout the transaction with Old Rome and since, treated $13,645,078 as the consideration actually paid in complying with Sec. 603 of the Pennsylvania Business Law; in advising Old Rome shareholders, in listing the 355,226 shares with the New York Stock Exchange; and in the divestiture proceedings in the District Court for the Northern District of New York. With this sum as the consideration paid, the final sentence of paragraph 2(a) as stated by the parties in the Cyprus agreement is meaningful and is accurate. 7 The figure therein of $12,718,000 is consistent with what the parties concerned in 1959 utilized and recorded. These are the critical considerations. 45