Court Opinion

ID: 3052770
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:44:02.728721+00
Date Added: 2024-06-11T12:44:22.820996
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

WESTERN FILTER CORPORATION,               
         Plaintiff-counter-defendant-
                           Appellant,
                   v.                            No. 07-55535
ARGAN, INC., a Delaware
Corporation; RAINER BOSSELMANN,                   D.C. No.
                                               CV-05-03548-SGL
an individual; ARTHUR F. TRUDEL,
                                                  OPINION
an individual; HAYWARD MILLER
III, an individual,
      Defendants-counter-claimants-
                           Appellees.
                                          
         Appeal from the United States District Court
             for the Central District of California
         Stephen G. Larson, District Judge, Presiding

                    Argued and Submitted
              June 3, 2008—Pasadena, California

                      Filed August 25, 2008

 Before: Diarmuid F. O’Scannlain and Richard C. Tallman,
         Circuit Judges, and James K. Singleton,*
                   Senior District Judge.

                   Opinion by Judge Tallman

   *The Honorable James K. Singleton, United States District Judge for
the District of Alaska, sitting by designation.

                               11635
             WESTERN FILTER CORP. v. ARGAN, INC.       11637

                        COUNSEL

Gregory A. Long, Sheppard Mullin Richter & Hampton, LLP,
Los Angeles, California, for the appellant.

Joseph L. Clasen, Robinson & Cole, LLP, Stamford, Connect-
icut, and Thomas J. Dolan, Robinson & Cole, LLP, New
York, New York, for the appellee.

                         OPINION

TALLMAN, Circuit Judge:

   Western Filter Corporation (“Western Filter”) appeals the
district court’s grant of summary judgment in favor of Argan,
11638           WESTERN FILTER CORP. v. ARGAN, INC.
Inc. (“Argan”). The district court had jurisdiction under 28
U.S.C. § 1332, and we have jurisdiction under 28 U.S.C.
§ 1291. We are asked to decide an issue of first impression
under California law, whether a provision within a Stock Pur-
chase Agreement (“SPA”) permitting the representations and
warranties of the parties to survive closing, also serves as a
contractual statute of limitation that reduces a longer period
otherwise provided by California law. Because the provision
at issue does not unambiguously state the parties’ intent to
contractually reduce the applicable California statute of limi-
tation to one year, we reverse and remand.

                                     I

   Puroflow, Inc. (“Puroflow”) designs, manufactures, and
sells industrial aerospace and automotive filtration products.
Puroflow is a wholly owned subsidiary of Argan.

  Western Filter competed with Puroflow in the filter busi-
ness. It decided to buy its competitor. On October 30, 2003,
Western Filter executed the SPA with Argan, acquiring all of
Puroflow’s stock for $3.5 million.1 The parties dispute
whether Argan conditioned the sale of Puroflow on an Octo-
ber 30 closing date.

   Both parties made several representations and warranties,
which are set forth in Article III of the SPA. The portion of
the contract at issue is found in Section 8. Section 8.1
(“Survival Clause”) provides that “[t]he representations and
warranties of [Western Filter] and [Argan] in this Agreement
  1
    These companies have a prior history of courtship. In 2002, Paul
Akian, President of Western Filter, offered to buy Puroflow for $5 million.
That deal fell apart and, in April 2003, Argan acquired Puroflow through
a private placement. In August 2003, Rainer Bosselmann, the Chief Exec-
utive Officer of Puroflow, contacted Akian about buying Western Filter.
Akian declined, but offered to buy Puroflow. On September 3, 2003,
Argan and Western Filter signed a Letter of Intent so Western Filter could
purchase Puroflow’s stock.
             WESTERN FILTER CORP. v. ARGAN, INC.           11639
shall survive the Closing for a period of one year, except the
representations and warranties contained in Section 3.1(a),
(b), (c), and (f) and 3.2(a) and (b) shall survive indefinitely.”

   The SPA also provides for an escrow agreement, which
required Western Filter to pay $300,000 in cash at closing to
an escrow agent. The escrow funds are intended to cover any
claims brought by Western Filter for indemnification under
Article VI of the SPA. Section 6.1 provides that Argan agrees
to indemnify Western Filter for “[a]ny and all Loss . . . result-
ing from any misrepresentation or breach of warranty by
[Argan] under Section 3.1,” or for “[a]ny and all Loss result-
ing from any non fulfillment of any covenant or agreement on
the part of [Argan] under Section 5.1 of this Agreement.” Sec-
tion 6.3 sets forth the procedures for asserting a right to
indemnification:

       Except as otherwise provided in sections 6.1 and
    6.2, subject to the limitations imposed by section
    8.1, promptly after receipt by an indemnified party
    pursuant to the provisions of this Article VI of notice
    of the commencement of any action, claim or pro-
    ceeding involving the subject matter of the foregoing
    indemnity provisions, such indemnified party shall,
    if a claim thereof is to be made against an indemni-
    fying party pursuant to the provisions of this Article
    VI, promptly notify such indemnifying party of the
    commencement thereof . . . .

   After acquiring Puroflow, Western Filter discovered that
Puroflow’s inventory was allegedly worth significantly less
than what Argan represented. On September 17, 2004, West-
ern Filter sent written notice to Argan, claiming that “the
management of Puroflow and Argan grossly misrepresented
the financial condition of Puroflow.” Western Filter claimed
damages of $2,002,580 and asserted that it “ha[d] a claim
against Argan not only for breach of representations and war-
ranties, but also for fraud in the inducement.” Nevertheless,
11640           WESTERN FILTER CORP. v. ARGAN, INC.
while “fully prepared to assert its claims in court, if neces-
sary,” Western Filter stated that it “would prefer to avoid pro-
tracted litigation, provided the matter c[ould] be settled
immediately for the sum of $700,000.” In the event Argan
was unwilling to settle, Western Filter stated that it would
“have no choice but to take such actions as may be necessary
to protect its interest in this matter.”

   Rainer Bosselmann responded to Western Filter’s notice
letter on September 29, 2004. He said that he was “disap-
pointed,” but felt that they could work through a lot of the
issues without “involving the lawyers again.” In late October
2004, Western Filter confirmed with Argan that the escrow
funds would be retained pending resolution of the dispute
between Western Filter and Argan.

   Six months later, Western Filter filed suit in the Los Ange-
les County Superior Court against Argan and its officers for
breach of contract, intentional misrepresentation, concealment
and nondisclosure, negligent misrepresentation, false promise,
negligence, and declaratory relief. Argan removed the matter
to federal court.2

   On March 15, 2007, the district court granted Argan’s
motion for summary judgment, concluding that Western Fil-
ter’s claims were barred by the one-year limitation set forth
in the Survival Clause.3 It concluded that “[t]he plain meaning
of section 8.1’s provisions clearly indicate that, if [Argan]
breached certain representations and warranties, then for a
one-year period after the closing Western Filter could file a
  2
     Argan’s counterclaim against Western Filter is not at issue in this
appeal.
   3
     The district court had previously denied Argan’s motion to dismiss the
Complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to
state a claim. The district court declined to address Argan’s arguments
regarding the survival of the representations and warranties at the pleading
stage. However, it left that argument open for Argan to raise in a motion
for summary judgment.
               WESTERN FILTER CORP. v. ARGAN, INC.                11641
claim against defendants for such breach, be it a suit for
indemnification (subject to the $300,000 monetary cap) or a
suit in law not subject to the monetary cap in the case of
intentional misrepresentations.” This interpretation was “best
exemplified by the fact that the parties themselves distin-
guished between those representations and warranties that
were time-barred by the SPA and those that were not time-
barred.”

   In support of its decision, the district court noted that the
indemnification provision expressly provides that an indem-
nity claim is “subject to the limitation imposed by section
8.1.” The court also noted that other courts have interpreted
materially indistinguishable language as creating a contractual
statute of limitation period, that discovery has developed no
evidence suggesting that the parties had a contrary under-
standing of the plain meaning of the Survival Clause, and that
the demand letter to Argan was not sufficient to toll the stat-
ute of limitation.

   To address Western Filter’s remaining arguments, the court
“accept[ed] and adopt[ed] as its own” Judge M. James
Lorenz’s decision in Herring v. Teradyne, Inc., 256 F. Supp.
2d 1118 (S.D. Cal. 2002). In Herring, as in this case, the sole
issue was whether a survival clause constituted a one-year
contractual statute of limitation or set forth the period of time
during which a breach could occur. 256 F. Supp. 2d at 1125.
Judge Lorenz concluded that the following survival clause
was sufficient under California law to limit the applicable
commercial statute of limitation: “[t]he covenants, agree-
ments, representations and warranties of the parties hereto
contained in this Agreement or in any certificate or other writ-
ing delivered pursuant hereto or in connection herewith shall
survive the Closing until the first anniversary of the Closing
Date.”4 Id.; see Cal. Civ. Proc. Code § 337 (the statute of limi-
  4
    The Clause went on to provide that “[n]o claim for indemnity under
this Agreement with respect to any breach of any representations, warran-
11642          WESTERN FILTER CORP. v. ARGAN, INC.
tation for an action brought for breach of a written contract is
four years); id. § 338(d) (the statute of limitation for an action
for relief on grounds of fraud is three years).

   In an unpublished memorandum disposition, a three-judge
panel of our court reversed the decision in Herring. See Her-
ring v. Teradyne, Inc., 242 Fed. Appx. 469 (9th Cir. July 13,
2007). We stated:

     We also disagree with the district court’s conclusion
     that the survival clauses contained in the merger
     agreements clearly and unambiguously reduced the
     statute of limitations from four years to one year.
     Parties may contractually reduce the statute of limi-
     tations, but any reduction is construed with strictness
     against the party seeking to enforce it. See Lewis v.
     Hopper, 140 Cal. App. 2d 365, 367 (Cal. Ct. App.
     1956). Here, we find no clear and unequivocal lan-
     guage in the survival clauses that permits the conclu-
     sion that the parties have unambiguously expressed
     a desire to reduce the statute of limitations.

Id. at *471.

                                   II

  We review de novo the district court’s grant of summary
judgment. Soldano v. United States, 453 F.3d 1140, 1143 (9th
Cir. 2006).

                                   III

  [1] Western Filter argues that the Survival Clause’s one-

ties and/or covenants of Company and/or Seller shall be made after the
applicable period specified in the preceding sentence and all such claims
shall be made in accordance with the applicable provisions of the Escrow
Agreement.” Id.
                WESTERN FILTER CORP. v. ARGAN, INC.                  11643
year limitation serves only to set forth the time period for
which a breach may occur or be discovered, whereas Argan
maintains that the Survival Clause serves as a contractual lim-
itation on the applicable statute of limitation.5 In California,
the statute of limitation for a contract claim is four years,
three years for a fraud or intentional misrepresentation claim,
and two years for a negligent misrepresentation claim. See
Cal. Civ. Proc. Code §§ 337, 338(d); Hydro-Mill Co., Inc. v.
Hayward, Tilton & Rolapp Ins. Assocs., Inc., 115 Cal. App.
4th 1145, 1155 (Cal. Ct. App. 2004).

   [2] “It is a well-settled proposition of law [in California]
that the parties to a contract may stipulate therein for a period
of limitation, shorter than that fixed by the statute of limita-
tions, and that such stipulation violates no principle of public
policy, provided the period fixed be not so unreasonable as to
show imposition or undue advantage in some way.” Moreno
v. Sanchez, 106 Cal. App. 4th 1415, 1430 (Cal. Ct. App.
2003) (internal quotation marks omitted). While allowed
under California law, contractual stipulations are not favored.
Lewis v. Hopper, 140 Cal. App. 2d 365, 367 (Cal. Ct. App.
1956) (stating that contractual stipulations are not favored
“because they are in derogation of the statutory limitation”
(internal quotation marks omitted)). Therefore, “they should
be construed with strictness against the party invoking them.”
Id. (internal quotation marks omitted).

   [3] Both parties agree that without the Survival Clause the
representations and warranties would have terminated at the
time of closing. “[R]epresentations and warranties are state-
ments of fact as of the date of the execution of the acquisition
agreement, and the truthfulness of the representations and
  5
    Argan contends that Western Filter has waived the argument that “Sec-
tion 8.1’s one year survival provision creates a period of time for the par-
ties to discover any breach of the representation[s] or warranties by a party
to the SPA.” We disagree. That interpretation of the Survival Clause
underlies Western Filter’s entire argument.
11644           WESTERN FILTER CORP. v. ARGAN, INC.
warranties as of both the date of execution and, when appro-
priate, the date of the closing is generally a condition to the
closing.”6 Samuel C. Thompson, Jr., Business Planning for
Mergers and Acquisitions 780 (Carolina Academic Press
2001) (1997). In other words, the representations and warran-
ties serve as a safety net for the seller and buyer. If, prior to
closing, either the seller or buyer discovers that a representa-
tion or warranty made by the other party is not true, they have
grounds for backing out of the deal. See id. (“If prior to clos-
ing a party discovers that a representation or warranty is mate-
rially inaccurate, the party can refuse to close and possibly
sue for damages.”).

   [4] The closing date itself triggers the contractual limitation
on liability. Unless the parties agree to a survival clause—
extending the representations and warranties past the closing
date—the breaching party cannot be sued for damages post-
closing for their later discovered breach. With that premise in
mind, Argan reasonably argues that the one-year limitation in
the Survival Clause was intended to serve as a contractual
time limit on any action brought based on a breach of the con-
tract’s representations and warranties. Under Argan’s theory,
Western Filter could not bring a claim without the Survival
Clause, and, even with the Survival Clause, Western Filter
only had one year after closing to bring such a claim.

   This interpretation has some basis in out-of-circuit case law.7
In State Street Bank & Trust Co. v. Denman Tire Corp., 240
F.3d 83 (1st Cir. 2001), the First Circuit held that a clause
stating that the representations and warranties “shall expire on
  6
   As a condition to closing, Section 5.1(a) provided:
     The representations and warranties of [Argan] under this Agree-
     ment shall be true and correct in all material respects as of the
     date of the Closing with the same effect as though made on and
     as of the date of the Closing.
  7
    Both parties concede that there is no controlling authority in our circuit
on the interpretation of California law.
             WESTERN FILTER CORP. v. ARGAN, INC.           11645
the second (2nd) anniversary of the Closing” clearly described
a contractual statute of limitation. Id. at 87-88. The court rea-
soned that “[t]o say that something ‘shall survive’ for a period
of time, . . . is very much like saying something ‘shall expire’
after a period of time.” Id. at 88. And, although the clause did
not include any language stating that a claim must be filed
within the limitation period, “the language was reasonably
susceptible to only one meaning: that any claim based on war-
ranties contained in the Purchase Agreement must be brought
within [the specified time period] of the closing.” Id. (alter-
ations in original) (internal quotation marks omitted); see also
Latek v. LeaseAmerica Corp., No. 90 C 7230, 1992 WL
170546, at *3 (N.D. Ill. July 16, 1992), aff’d, 7 F.3d 238 (7th
Cir. Sept. 22, 1993) (stating that a provision that warranties
“shall survive” for 18 months from the closing date “clearly
describes a contractual statute of limitations”); Common-
wealth Fin. Corp v. USAAmeribancs, Inc., No. 86 C 6181,
1987 WL 19142, at *2 (N.D. Ill. Oct. 20, 1987) (concluding
that a cause of action was time-barred when the provision
authorizing suit stated that the seller shall indemnify buyer for
one year after closing).

   [5] However, California law does not favor contractual
stipulations to limit a statute of limitation. Such a stipulation
must be clear and explicit, and is to be strictly construed
against the party invoking the provision. Lewis, 140 Cal. App.
2d at 367. California courts have also suggested that language
limiting the life of a warranty is not sufficiently clear and
explicit to also limit the statute of limitation. In Hambrecht &
Quist Venture Partners v. American Medical International,
Inc., 38 Cal. App. 4th 1532 (Cal. Ct. App. 1995), the Califor-
nia Court of Appeal held that “a standard choice-of-law provi-
sion (which states that a contract shall be governed by the
‘laws’ of a particular jurisdiction) incorporates the statutes of
limitations of the chosen state.” Id. at 1536. In doing so, the
court rejected the plaintiffs’ argument that “the absence of a
‘time to sue’ clause or an explicit reference to Delaware’s
statutes of limitations means that the parties intended the
11646        WESTERN FILTER CORP. v. ARGAN, INC.
forum’s (California’s) statutes of limitations to apply.” Id. at
1544 n.10. It did not matter that in dealing with other “tim-
ing” issues the parties had expressly stated that the representa-
tions and warranties survived five years beyond closing
because, as the court held, “[b]y using the term ‘laws’ in the
choice-of-law provision, the parties incorporated Delaware’s
statutes of limitations without need for any additional contract
language.” Id. Moreover, the court stated that “a provision
specifying the life of a warranty has no bearing on the time
period for filing suit after the warranty has been breached.”
Id. Although that statement appears to be dicta, the over-
whelming essence of the California appellate court decisions
is that parties must be more explicit than the language at issue
in this case.

   Like California, New York law allows parties to agree “to
a shorter period of limitations within which an action may be
brought so long as the period agreed to is not unreasonably
short.” Hurlbut v. Christiano, 63 A.D. 2d 1116, 1117 (N.Y.
App. Div. 1978). However, “[c]ontractual stipulations which
limit the right to sue to a period shorter than that granted by
statute, are not looked upon with favor because they are in
derogation of the statutory limitation. Hence, they should be
construed with strictness against the party invoking them.” Id.
(internal quotation marks omitted). In Hurlbut, the pertinent
clause stated the following: “The parties hereto further agree
that the representations and warranties set forth in Sections
4.01(d) and 4.03(g) of the Purchase Agreement between them
dated February 29, 1972 shall survive the closing for a period
of (3) years.” Id. The court found that the language in this
clause did not create a contractual statute of limitation. It
stated: “The language of the agreement is clear and unambig-
uous and suggests nothing from which a shortened period of
limitations can be inferred.” Id. at 1117-18.

   [6] Although Argan’s interpretation is reasonable—and
ultimately may be more practical—the Survival Clause can
also be reasonably read as Western Filter suggests: that the
                 WESTERN FILTER CORP. v. ARGAN, INC.                    11647
one-year limitation serves only to specify when a breach of
the representations and warranties may occur, but not when an
action must be filed.8 Western Filter’s interpretation becomes
even more reasonable in light of California’s policy of strictly
construing any contractual limitation against the party seeking
to invoke the time limitation.9 See Lewis, 140 Cal. App. 2d at
367. Because the language of the Survival Clause is ambigu-
ous, the district court erred in holding that the clause created
a limitation period. Accordingly, we reverse the summary
judgment entered by the district court.10 Each party shall bear
  8
     Contrary to Argan’s assertion, this interpretation gives effect to the
one-year limitation on the general representations and warranties, as well
as the specific representations and warranties that survive “indefinitely.”
Under the one-year limitation, Western Filter can sue for breach of repre-
sentations and warranties based on facts discovered pre-closing and up to
one year after closing. While limited to when the basis for the breach may
arise, Western Filter can bring its action anytime so long as it is within the
applicable California statute of limitation. On the other hand, an action for
a breach of the representations and warranties covered by the “indefinite-
ly” portion of the Survival Clause may be discovered anytime during the
applicable statute of limitation.
   9
     Argan relies on secondary authority in support of its argument that it
is common understanding among practitioners that limitations such as that
found in the Survival Clause serve as a contractual statute of limitation.
It contends that “[n]owhere in . . . real practice[ ] do . . . lawyers spell out
that the time periods being negotiated are intended as limitations for sub-
sequent suit.” However, in Moreno, the parties did just that. There, the
clause provided that “any lawsuit, sounding in either contract or tort, had
to be filed within a year from the date of the inspection. The contract
noted, ‘This time period is shorter than otherwise provided by law.’ ” 106
Cal. App. 4th at 1420. Although the court questioned the reasonableness
of the limitation, given the unequivocal language provided, it had no rea-
son to question the parties’ intent. See also Lewis, 140 Cal. App. 2d at
365-66 (quoting the survival clause, which stated: “No suit or action on
this bond to recover for labor performed or material furnished in respect
to work herein referred to shall be sustained unless the same be com-
menced within the period provided by law after the claimant files his
claim or lien, or if he files no such claim or lien, unless the suit or action
shall be commenced within six (6) months after completion of the work
described in said contract” (internal quotation marks omitted)).
   10
      Because we conclude that the Survival Clause was ambiguous, we
need not address Western Filter’s remaining arguments: that, in light of
11648            WESTERN FILTER CORP. v. ARGAN, INC.
its own costs on appeal.

   REVERSED and REMANDED.

the California Court of Appeal decision in Moreno, 106 Cal. App. 4th
1415, the district court’s construction of the Survival Clause violates pub-
lic policy since it fails to make allowance for the delayed discovery of
fraud; that Western Filter’s written notice was sufficient to toll the statute
of limitation; or that the district court erred in concluding that Western Fil-
ter’s claims were based on conduct covered by the representations and
warranties.