Opinion ID: 219823
Heading Depth: 1
Heading Rank: 3

Heading: Purchase Agreement

Text: At issue under the Purchase Agreement is whether the cash that was in CalFit’s bank account at the time of Closing was properly kept by Lifestyle, or whether it should have been given to CalFit. - 15 - Nos. 10-3257, 10-3258 California Fitness I, Inc. V. Lifestyle Family Fitness, Inc. Lifestyle contends that the Agreement clearly entitles it to that money. “[A]s to entitlement of cash, [the Purchase Agreement] is unambiguous,” they argued to the district court. “Section 3 specifically provides we’re entitled to cash.” Conversely, CalFit argues that because the funds were in the account prior to closing, under Section 8 they were intended to remain with the Seller, and therefore Lifestyle wrongfully kept that money and breached the Purchase Agreement. The pertinent provisions bear repeating. The question is, was the money in the account part of what Lifestyle bought? First, Section 3 of the Purchase Agreement read: 3. Purchase and Sale of Assets: Subject to each and every term, condition, and provision of this Agreement, at the Closing, the Seller shall sell to the Buyer, and the Buyer, in reliance upon the covenants, representations, warranties, and agreements of the Seller contained in this Agreement, shall purchase from the Seller the “Purchased Assets” (as defined herein) owned or used . . . by Seller in the conduct of Seller’s business at the Fitness Centers, as such business is conducted on the date of this Agreement, and the Closing Date, including, without limitation, each and all of the following items of Property: Except as otherwise expressly provided in this Agreement, all accounts, chattel paper, and instruments existing as of the Closing Date arising prior to the Closing from the conduct of business by the Seller at the Fitness Centers, including, without limitation, all cash, prepaid accounts, accounts, chattel paper, and instruments arising prior to the Closing in connection with Membership Agreements entered into with members of the Fitness Centers. . . . (emphasis added). Additionally, the Definitions section of the Agreement defined “Purchased Assets” as having the meaning “assigned to that term in Section 3.” This lends weight to the idea that “what” was being purchased is determined primarily through Section 3. By its plain language, Section 3 states that Lifestyle would purchase from CalFit “all accounts,” “including, without limitation, all cash, prepaid accounts, [and] accounts,” among other items. This list is included in the same section that describes the rest of the purchased items, including furniture, interest in leases, contract rights with members, and so on. Importantly, it says the Seller is entitled to these items - 16 - Nos. 10-3257, 10-3258 California Fitness I, Inc. V. Lifestyle Family Fitness, Inc. “arising prior to the Closing.” When looked at alone, the provision seems to clearly entitle Lifestyle to the funds in the bank account as part of the purchase transaction. However, Section 8 of the Purchase Agreement then states: 8. Closing Prorations, Payments and Adjustments. It is the intent of Buyer and Seller that the prorations, payments, and adjustments at Closing or thereafter shall be made in a manner so that all income and expenses of the Fitness Centers prior to the Closing Date shall remain with or be an obligation of Seller, respectively, and that all income from the Purchased Assets and expenses for Obligations assumed by Buyer hereunder, shall belong to or be an Obligation of Buyer, respectively, from and after the Closing Date. This section, conversely, seems to state that the parties intend that CalFit will keep “all income and expenses” prior to the Closing date—which would include cash in the bank account. CalFit notes that Section 3 is made “subject to” the other provisions of the Agreement; however, it is unclear whether Section 8 should modify Section 3's provision because Section 8 deals with prorating—there’s no indication such cash should be prorated. At worst, these two provisions can be read to be in complete conflict. At best, they are very ambiguous, and much more external information is needed to determine what items the parties intended to fall under each provision.8 CalFit did seek summary judgment on the issue of whether Lifestyle had breached the Purchase Agreement by keeping the money in the CalFit account; however, the court denied summary judgment. Though the court did not explain its decision, it implicitly had to determine that breach of the contract could not be determined as a matter of law—otherwise, if the court at that time 8 The parties assert that they are prepared with factual background, parol evidence documents, and witness testimony that would shed light on their intent on this very issue. - 17 - Nos. 10-3257, 10-3258 California Fitness I, Inc. V. Lifestyle Family Fitness, Inc. interpreted the Agreement to clearly entitle CalFit to that money, summary judgment would have been appropriate. At trial, the court explicitly stated that the Agreement was not clear. Defense counsel was trying to explain the distinction between his two arguments, and stated that “to the extent the Court determines that the asset purchase agreement itself is ambiguous, what I'm trying to do— at which point the court cut him off and explicitly stated, I think it is ambiguous. Later, the court acknowledged that some parts seem in conflict. “To me - the agreement as a whole seems pretty clear as to what it is intended to do. It may be this or that item that’s hard to fit in.” However, after hearing from a single witness—on behalf of CalFit—the court changed its mind. When trial started the second day, the judge told the parties that “I think overnight I was letting my mind gel on this . . . I think I’m actually in a position to make some definitive holdings.” He found that the Purchase Agreement unambiguously required the money to go to CalFit. In ruling definitively on the meaning of the Purchase Agreement, the court found that “the provision that says the cash and debts belong to the seller before that date and to the buyer after that date”—which is Section 8—essentially “required sort of a snapshot be taken of that day.” However, the defendants had asserted that this conflicted with Section 3, and the court did not find a way to reconcile the two. Ultimately, the court’s order did not address the seemingly-conflicting terms in the Purchase Agreement. It found that the “Assert Purchase Agreement is clear and unambiguous,” giving explanations for its readings of Paragraph 45 and Paragraph 8. It stated that “the plain meaning” of Paragraph 8 is that all income and revenue before November 16, 2005 belonged to Plaintiffs, and after that date belonged to Lifestyle. However, the court’s order nowhere even mentions Section 3, - 18 - Nos. 10-3257, 10-3258 California Fitness I, Inc. V. Lifestyle Family Fitness, Inc. which specifically states that Lifestyle was purchasing the “cash” in existence on the closing date. “The intention of the parties must be derived . . . from the instrument as a whole, and not from detached or isolated parts thereof.” Whitt Mach., 377 F. App’x at 496 (internal quotations omitted). The court’s determination based solely on Section 8 violates this requirement. Simply put, Section 3 stated that cash and accounts “arising prior to the Closing” are purchased and belong to Lifestyle, while Section 8 says that “income and expenses” “prior to the Closing Date” are to “remain with” CalFit. It cannot be said that the meaning of these provisions as they related to the bank account is unambiguous and required judgment for CalFit as a matter of law. The parties also unintentionally acknowledge this, as both rely on much outside information to frame their explanations for the meaning of this provision. Therefore, we find that the Purchase Agreement was ambiguous, and thus REVERSE and REMAND for the trial court to consider parol evidence as to the meaning of the Agreement.