Court Opinion

ID: 1033737
Source: CourtListenerOpinion
Date Created: 2013-07-16 00:00:49.216711+00
Date Added: 2024-06-11T12:30:33.550472
License: Public Domain

UNPUBLISHED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Affirmed by unpublished per curiam opinion.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,
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Unpublished opinions are not binding precedent in this circuit.

                                2
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

                                         3
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

                                                4
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 QSF-
      level 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

                                             5
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

                                         6
     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.”

                                       7
                                 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 twenty-
     five (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

                                  8
     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. . . .

          . . . .

                                 9
     (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

                          10
      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).

                                            11
                                               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,

                                               12
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

                                            13
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

                                        14
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

                                           15
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

                                         16
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

                                            17
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

                                               18
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.

                                            19
       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 QSF-

level 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.

                                           20
     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

                                         21
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

                                           22
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

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