Court Opinion

ID: 3197832
Source: CourtListenerOpinion
Date Created: 2016-04-26 18:00:25.713153+00
Date Added: 2024-06-11T07:39:11.815075
License: Public Domain

United States Court of Appeals
                       For the First Circuit

No. 14-2156

                       MERCURY SYSTEMS, INC.,

                        Plaintiff, Appellant,

                                 v.

              SHAREHOLDER REPRESENTATIVE SERVICES, LLC,

                        Defendant, Appellee.

          APPEAL FROM THE UNITED STATES DISTRICT COURT
                FOR THE DISTRICT OF MASSACHUSETTS

         [Hon. Richard G. Stearns, U.S. District Judge]

                               Before

                    Thompson, Lipez, and Barron,
                           Circuit Judges.

     Christopher H.M. Carter, with whom Hinckley, Allen & Snyder
LLP was on brief, for appellant.
     Roger A. Lane, with whom Courtney Worcester and Foley &
Lardner LLP were on brief, for appellee.

                           April 26, 2016
             LIPEZ,   Circuit       Judge.     We    must   interpret   a   merger

agreement in which one party agreed to indemnify the other against

a purely hypothetical tax loss.              The sellers agreed to indemnify

the buyer for the tax liabilities of the company being sold, except

that   the   tax    bills     for   indemnification     purposes    were    to   be

calculated as if certain deductions would not be taken, when both

parties knew they would be.           Given that these deductions, perhaps

in combination with other deductions, reduced the company's tax

liability to zero, the company's tax prepayments and credits were

refunded in their entirety, benefitting the buyer as the company's

new    owner.      Yet,     because   the    calculation     of   the   indemnity

obligation was based on a counterfactual measure of tax liability,

that calculation resulted in the sellers' nonetheless owing the

buyer a substantial amount of money.                The issue that divides the

parties is whether the prepayments and credits, and resulting tax

refunds, affect the tax indemnification obligation of the sellers.

             The district court concluded that the indemnification

provision, by its terms, unambiguously required that the indemnity

obligation be offset by the amount of the refunded prepayments and

credits.     It therefore entered judgment on the pleadings in favor

of the seller.

             We    conclude    that    the    indemnification      provision     is

ambiguous as to how the tax refunds affect the indemnification

obligation of the sellers.             Though these sophisticated parties

                                       - 2 -
knew of the tax prepayments and credits, and expected substantial

tax refunds, they failed to specify how those refunds should be

treated.   This critical omission renders their contract ambiguous

on the issue before us.      The plain language arguments of the

parties are not fully convincing; reasonable interpretations of

the text support both positions. Their arguments about the purpose

and negotiating history of the provision cannot be resolved without

the aid of a fact-finder.    Indeed, the parties dispute key facts

about the company's tax refunds.     Hence, we vacate the judgment of

the district court and remand for further proceedings.

                                 I.

A. Background

           The indemnity provision at issue is part of a 2011 merger

agreement by which Mercury Systems, Inc.1 ("Mercury") purchased

KOR Electronics ("KOR") from KOR's stockholders and optionholders

("securityholders,"    represented     on   appeal   by   Shareholder

Representative Services, Inc., "SRS").      Consistent with the terms

of the agreement, Mercury created a merger subsidiary (King Merger

Inc.) and merged it with and into KOR, which thus became a wholly-

owned subsidiary of Mercury.

           Mercury agreed to pay KOR's securityholders $70 million

for the company, with adjustments for, inter alia, merger-related

1    At the time of the transaction, Mercury was called "Mercury
Computer Systems, Inc."

                               - 3 -
expenses and the amount of cash and debt on KOR's books as of the

closing date.     Merger Agreement ["MA"] § 3.02.   These adjustments

would be based on a balance sheet reflecting estimates of KOR's

2011 assets and liabilities, which KOR promised to provide.        MA

§ 3.05(a).     Of the purchase amount of $70 million, $10.65 million

would be paid into an escrow account to cover various obligations

of the securityholders.     MA § 3.03(b).

             The indemnity arrangement relevant to this appeal is set

forth in detail in Article X, section 10.02(a), and referenced in

sections 10.01 and 10.05(a) and (b).        Section 10.02(a) provides

that SRS will prepare KOR's 2011 federal and state tax returns.

Then, SRS, on behalf of the former securityholders, must release

money from the escrow account to pay Mercury "the amount of the

aggregate Tax liabilities due, if any."     App. 31-32.2   The unusual

feature of the arrangement is how the obligation to pay Mercury

was to be measured.      When preparing KOR's 2011 tax returns, SRS

was required to claim two types of merger-related expenses as tax

deductions.     This requirement is stated in section 10.02(a) and

echoed in sections 10.05(a) and (b).     App. 41-42 (requiring SRS to

"giv[e] effect to any deductions described in Section 10.[0]5");

id. at 54-55 (specifying that the merger-related deductions "shall

2    The relevant text of the merger agreement, including section
10.02, is set out in the Appendix ("App.").     Citations to the
appendix refer to particular line numbers therein.

                                 - 4 -
be claimed"); id. 61-62 (same).            However, the securityholders'

obligation to pay Mercury was to be calculated without claiming

those deductions.   MA § 10.02(a).     The arrangement is set forth as

follows:

           [F]or purposes of determining the Tax liability due
           with respect to such Tax Return for purposes of
           calculating the Securityholders' indemnification
           obligations, the determination of the Tax liability
           for any such Pre-Closing Tax Period will be
           calculated and determined excluding any deductions
           described in Section 10.05 below.      The amounts
           actually due on the Tax Return (after giving effect
           to any deductions described in Section 10.[0]53
           below) shall promptly be paid by [Mercury] to the
           appropriate Governmental Authority.

Id. (App. 34-46) (emphasis in original).          In other words, Mercury

would receive, in payment of the indemnity obligation, an amount

from escrow equal to KOR's tax liabilities as calculated without

the deductions, but pay KOR's actual taxes (if any were still owed)

computed with the deductions.        Because KOR was required to claim

the   section   10.05   deductions    on    its   2011   tax   return,   the

calculation of taxes without those deductions was necessarily

greater than KOR's actual taxes owed. SRS conceded in the district

court that this arrangement could require it to pay Mercury for "a

3    The text refers to "Section 10.5 below," though no such
section exists. The parties clearly intended to reference section
10.05.

                                 - 5 -
phantom   'liability'   for   indemnification   purposes   that   is   not

actually due to the government."

           Section 10.02(a) creates an obligation specific to one

tax year, the year to which the merger-related tax deductions

apply: 2011.   Further, by its terms, section 10.02(a) applies only

to taxes related to returns "due after the Closing Date."              App.

25. The parties identify no tax period, other than 2011, for which

returns had yet to be filed as of December 30, 2011.                   This

obligation -- specific to 2011 -- is distinct from the conventional

tax indemnification provision in section 10.01, which applies more

generally to all pre-closing time periods:

           [E]ach Securityholder shall . . . indemnify and
           hold harmless [Mercury] from, against and in
           respect of any and all Losses4 that constitute or
           that result from, arise out of or relate to,
           directly or indirectly [] Taxes (or the non-payment
           thereof) of [KOR] for all Pre-Closing Tax Periods
           . . . .5

4    "Losses" are defined to include, among other things,
"assessments, fines, penalties, [and] Taxes."      MA § 9.01(a).
"Taxes," in turn, includes "any and all federal, state, local, or
foreign taxes . . . including any interest, penalty, or addition
thereto." MA § 1.01.

     5 "Pre-Closing Tax Periods" is defined to include the 2011
tax year, although the merger closed on the last day of that tax
year. MA § 1.01.

                                 - 6 -
MA § 10.01 (App. 6-11.).    Section 10.01 clarifies, however, that

this general tax indemnification provision does not override the

specific arrangement for 2011:

          Notwithstanding any other provision of this
          Agreement, the determination of the Taxes with
          respect to this Section 10.01 will be calculated
          without   taking  into   account  any deductions
          described in Section 10.05 below.

MA § 10.01 (App. 12-15).   In other words, section 10.01 recognizes

that the former securityholders are required to indemnify Mercury

for more than its actual tax losses for 2011, consistent with

section 10.02(a).

          Despite the detailed treatment of tax matters in Article

X, and though the parties anticipated that KOR would receive tax

refunds for 2011, the merger agreement does not explicitly address

KOR's expected tax refunds or mention any offset.

          Mercury, its subsidiary King Merger, KOR, and SRS (for

KOR's securityholders) signed the merger agreement on December 22,

2011.   In connection with the agreement, KOR furnished Mercury

with a Company Disclosure Schedule, including its consolidated

financial statements.6 The statements contained tax data for prior

6    These statements are fairly incorporated into the First
Amended Complaint. See Beddall v. State St. Bank and Tr. Co., 137
F.3d 12, 17 (1st Cir. 1998).

                                 - 7 -
years and year-to-date tax figures for 2011.   The merger closed on

December 30, the last day of KOR's federal tax year.

          To determine KOR's actual 2011 tax obligations, SRS took

advantage of the merger-related deductions specified in section

10.05, as section 10.02 required.      With those deductions taken

into account, KOR operated at a loss for federal tax purposes and,

consequently, had no federal tax liability.    Having prepaid $1.42

million in federal taxes and owing no federal income tax, KOR was

refunded all $1.42 million.7      Similarly, after deducting the

merger-related expenses, KOR was left with no income taxable by

various states.8   As a result, KOR's state tax prepayments and

credits exceeded what it actually owed, and it accordingly received

$340,000 in state tax refunds.   SRS asserts that the federal and

state refunds were the result of the merger-related tax deductions.

Mercury disagrees, claiming that the parties "expected" that $1.76

million "in Tax pre-payments and over-payments would be refunded

to KOR for the benefit of Mercury, irrespective of the Section

7    For the convenience of the reader, we round these figures to
the nearest $10,000.

8    Mercury claims that KOR had no taxable income for state tax
purposes, and, accordingly, its $340,000 in state tax prepayments
were entirely refunded. SRS claims that KOR did owe some state
taxes even after the deductions were taken into account.        SRS
claims that KOR prepaid $410,000 in state taxes, of which only
$340,000 was refunded. Given our holding that the agreement is
ambiguous, we need not determine whether SRS is correct that KOR's
state tax prepayments must be offset, and, hence, need not consider
whether those prepayments amount to $410,000 or $340,000.

                               - 8 -
10.05 Deductions."     Whether or not the merger-related deductions

were the cause, it is undisputed that KOR was refunded a total of

$1.76 million by federal and state tax authorities for 2011,

benefitting Mercury as KOR's new owner.

           To    determine   the    securityholders'   tax   indemnity

obligation, Mercury recalculated KOR's tax liabilities without the

deductions.     In that calculation, KOR had a taxable income of over

$6 million in 2011, resulting in substantial (though hypothetical)

state and federal tax obligations.         Mercury asserts that the

correct measure of KOR's 2011 tax liabilities for indemnification

purposes is $2.4 million.     Because SRS already has paid $570,000

of the indemnity obligation,9 Mercury now seeks $1.83 million from

SRS.   SRS agrees that $2.4 million is the correct measure of KOR's

2011 tax indemnification obligation, not counting prepayments and

credits, but asserts that after the offset for the $1.76 million

in prepayments and credits, only $640,000 was owed.          Since SRS

9    On   August   31,   2012,   Mercury   claimed   $620,000   for
indemnification of KOR's (hypothetical) 2011 federal tax
liability, calculated pursuant to section 10.02 of the merger
agreement, including an offset for tax refunds. Mercury's claim
certificate did not purport to discharge its tax indemnity claims
entirely.   SRS consented to release $570,000 from escrow, but
contested $50,000 of the claimed amount. SRS did not state that
it considered its tax indemnity obligations to be fully discharged.
Then, on January 28, 2013, Mercury claimed the right to additional
indemnification payments. Mercury had recalculated what it was
owed under section 10.02(a), this time without offsetting the tax
refunds. Mercury ultimately asked for $1.83 million ($2.4 million
less the earlier payment of $570,000.)

                                   - 9 -
previously paid $570,000, it argues that Mercury is now owed only

$70,000.

B.   Procedural History

            The   operative     complaint    here     is   the   First   Amended

Complaint, which Mercury filed against SRS and various former

securityholders on October 21, 2013.                In it, Mercury asserted

claims for, inter alia, declaratory relief and breach of contract.

In Count I, Mercury sought a declaration that it was entitled to

$1.83   million    from   the    escrow     account    pursuant    to    section

10.02(a)'s indemnification calculation.               In Count IV, Mercury

asserted that SRS had breached the merger agreement by failing to

release those funds from escrow, and sought damages.

            SRS moved for partial judgment on the pleadings on Counts

I and IV.   Mercury opposed the motion and filed a cross motion for

partial judgment on the pleadings.            The district court granted

SRS's motion for judgment on the pleadings, denied Mercury's

motion, and entered judgment for SRS.           Mercury timely filed this

appeal.10

10   The parties reached a partial settlement that resolved the
remaining issues in the case, though preserving Mercury's claim
under Count III for indemnification of attorney's fees and costs
related to this action concerning Counts I and IV.

                                   - 10 -
                                  II.

A. Standard of Review

            We review cross-motions for judgment on the pleadings de

novo, viewing the pleadings in the light most favorable to the

party opposing the motion.      Curran v. Cousins, 509 F.3d 36, 43

(1st Cir. 2007).     "Cross motions simply require us to determine

whether either of the parties deserves judgment as a matter of law

on facts that are not disputed." Barnes v. Fleet Nat'l Bank, N.A.,

370 F.3d 164, 170 (1st Cir. 2004) (quoting Wightman v. Springfield

Terminal Ry., 100 F.3d 228, 230 (1st Cir. 1996)).         This analysis

is similar to that used for cross-motions for summary judgment,

Curran, 509 F.3d at 44, though for the purposes of judgment on the

pleadings the court ordinarily may consider only facts contained

in the pleadings and documents fairly incorporated therein, and

those susceptible to judicial notice, R.G. Fin. Corp. v. Vergara-

Nuñez, 446 F.3d 178, 182 (1st Cir. 2006).

B. Massachusetts Law

            Under Massachusetts law, contract terms are ambiguous

when they are "inconsistent on their face or where the phraseology

can support reasonable difference of opinion as to the meaning of

the words employed and obligations undertaken."          Fashion House,

Inc. v. K Mart Corp., 892 F.2d 1076, 1083 (1st Cir. 1989)).

Ambiguity   exists   where   "reasonably   intelligent   persons   would

differ as to which meaning is the proper one."            Id. (quoting

                                 - 11 -
Citation Ins. Co. v. Gomez, 688 N.E.2d 951, 953 (Mass. 1998)); see

also Caldwell Tanks, Inc. v. Haley & Ward, Inc., 471 F.3d 210, 215

(1st Cir. 2006).        Where more than one interpretation fits the

literal meaning of the text and is compatible with common sense

and practical economic reality, a court may find a provision to be

ambiguous as a matter of law.          See Den Norske Bank AS v. First

Nat'l Bank of Boston, 75 F.3d 49, 54-55 (1st Cir. 1996).

            Where "the contract language is ambiguous, on its face

or   as   applied,"     contract    interpretation     normally      becomes   a

question    of   fact   to   be   decided    with   reference   to   extrinsic

evidence.    Den Norske Bank, 75 F.3d at 52 (citing Freelander v. G.

& K. Realty Corp., 258 N.E.2d 786, 788 (Mass. 1970); Robert Indus.,

Inc. v. Spence, 291 N.E.2d 407, 410 (Mass. 1973)).                   Extrinsic

evidence may include the parties' negotiations during contracting,

their course of performance under the contract, their course of

dealing prior to the contract, and trade usage in the relevant

industry.    Id. at 52-53.

                                     III.

            As described above, this case involves three provisions

of the merger agreement: sections 10.01, 10.02(a), and 10.05.              The

last of those, 10.05, simply obliges Mercury to take the applicable

merger-related deductions when filing returns for "the Pre-Closing

Tax Period," and it is not in dispute.              The controversy centers

primarily on section 10.02(a) and the indemnification amount it

                                    - 12 -
requires SRS to pay Mercury.           Although the parties agree that the

provision's purpose was to pay Mercury the value of the merger-

related tax deductions, they disagree on the magnitude of that

benefit.      The relationship between section 10.01, the general

indemnification provision, and section 10.02(a) is one of the

questions    that    must   be   considered     in   construing   the    latter

provision.

             SRS accepts that Mercury was owed the $2.4 million

attributable to the merger-related deductions, but it insists that

the parties understood that part of that amount -- $1.76 million

-- had already been paid in the form of KOR's tax refunds.                   SRS

draws support for its interpretation from the text of section

10.01,     which    imposes      an     indemnification    burden       on   the

securityholders for "losses," while instructing that the 10.05

deductions must be treated differently.               Mercury, on the other

hand, contends that SRS must pay the full $2.4 million from the

escrow account.       Mercury argues that, because KOR was in a tax

loss position for 2011 and thus had no tax debt, KOR would have

received full refunds of its tax prepayments even without the

merger-related deductions.            Hence, the refunds were unrelated to

the payment required by section 10.02(a), and, under Mercury's

reading, section 10.02(a) in effect amounted to a price adjustment.

             We first review the pertinent terms of the agreement and

then     briefly    consider     the    parties'     additional   contentions

                                       - 13 -
regarding its construction.        See Den Norske Bank, 75 F.3d at 52-

53.

A. Plain Language

      We begin our examination of the agreement's language with

section 10.02(a), the provision that details the indemnification

benefit    to   Mercury,    and   then   consider   whether   the   general

indemnification provision, section 10.01, sheds light on how that

benefit is to be calculated.

      1.   Section 10.02(a)

      This section, labeled "Tax Return Preparation," appears to

have three primary purposes.       First, it states SRS's obligation to

prepare, and Mercury's obligation to file, any KOR tax returns

covering pre-closing time periods that are due after the merger's

closing    date.     App.    19-25.      That   obligation,   of    course,

incorporates the requirement of section 10.05 that Mercury take

advantage of available merger-related deductions.             App. 40-44.

Second, section 10.02(a) provides for a transfer of funds from the

escrow account to Mercury to cover payment of the taxes due for

the pre-closing period, but with the amount calculated as if the

merger-related deductions had not been taken.         App. 33-40.    Third,

section 10.02(a) requires Mercury to promptly pay "[t]he amounts

actually due on the Tax Return."            App. 40-41.   Thus, the text

plainly requires payment to Mercury of an amount in excess of the

                                   - 14 -
actual tax debt, leaving Mercury with a cash payment that appears

to be, in effect, a purchase price adjustment.

            Strikingly, section 10.02(a) does not in explicit terms

address the fact -- known to both parties -- that KOR had made

substantial prepayments of its tax obligations and, accordingly,

expected refunds.11           Mercury argues that this omission itself

reveals that the parties did not intend to offset SRS's indemnity

obligation by the amount of the anticipated refunds.                    It insists

that   a   deduction     of    that   magnitude   from    the     tax    liability

calculation cannot be presumed from silence, and it asserts that

implying an offset into the agreement is tantamount to rewriting

the contract.         See Paterson-Leitch Co. v. Mass. Mun. Wholesale

Elec. Co., 840 F.2d 985, 991 (1st Cir. 1988) (warning that courts

should     not   "rewrite      contracts     freely    entered    into     between

sophisticated business entities" (quoting RCI Ne. Servs. Div. v.

Bos. Edison Co., 822 F.2d 199, 205 (1st Cir. 1987))).

            SRS, however, draws meaning from the fact that section

10.02(a)    addresses       both   preparation    of   tax   returns      and   the

calculation      of   the   indemnity      obligation.       It   sees    a   plain

recognition of the tax-refund offset in the relationship between

11   KOR's tax prepayments and credits were among KOR's assets, as
reflected on the balance sheet exchanged by the parties during
negotiations.      In  addition,   KOR's   pre-closing   financial
disclosures informed the parties that the prepayments and credits
would result in refunds.

                                      - 15 -
the provision's requirements, emphasizing that SRS's obligation to

make indemnification payments from the escrow account is expressly

linked to the preparation of tax returns through the phrases

"[w]ith respect to any such Tax Return," App. 25-26, and "with

respect to such Tax Return."    App. 34-35.    Thus, SRS argues, the

indemnification must be calculated "on the same basis as the 'real'

tax calculation -- that is, on the basis of KOR's tax return --

with the only departure . . . being the exclusion of two deductions

specified in Section 10.05."     The "real" tax calculation would

include deducting the amount of any prepayments and refundable

credits to arrive at the amount owed at the time the return is

filed.   SRS thus reads section 10.02(a), in context, to include an

offset for the amount of prepayments and refundable credits.

           We conclude that the language of section 10.02(a) is

reasonably susceptible to both of these interpretations.     On the

one hand, as Mercury argues, it is difficult to imagine the parties

intending, but not expressly addressing, the substantial reduction

in the indemnification obligation that would occur through an

offset for the tax prepayments.         Contrary to SRS's view, the

language linking the indemnification amount to "such Tax Return"

does not inevitably refer to the routine mechanics of calculating

taxes -- with an offset for prepayments and credits -- but may be

a simple reference back to the provision's subject-matter, i.e.,

a tax return due after the closing date for a pre-closing period.

                               - 16 -
If, as Mercury argues, the tax calculation was intended to define

an appropriate "rebate" for Mercury -- rather than a classic

"indemnification" -- it would be reasonable to conclude, absent

explicit instruction to the contrary, that the agreement does not

call for deducting the prepayments and credits. On the other hand,

as described above, the focus in section 10.02(a) on both tax

return preparation and indemnification makes plausible SRS's view

that the required payment was intended to be a net amount.

           Hence, the language of section 10.02(a), on its own,

leaves    us   uncertain      about      what    the     parties       intended.

Notwithstanding     its   view    that   the    section's      plain    language

requires an offset for the tax refunds, SRS asserts that the text

of section 10.01 clarifies any possible ambiguity and reinforces

its contention that the amount owed to Mercury is the difference

between the total merger-related tax savings and the refund amount.

We thus consider whether the ambiguity we discern in section 10.02

is resolved by section 10.01's plain language.

           2. Section 10.01

           The conventional tax indemnification language of section

10.01    protects   Mercury      against,    inter     alia,   "any     and   all

Losses . . . relate[d] to . . . Taxes (or the non-payment thereof)

. . . for all Pre-Closing Tax Periods."              App. 8-10.        SRS avers

that this language, notwithstanding its generality, is susceptible

to only one meaning.      It asserts that the term "Losses," App. 8,

                                    - 17 -
read in its "usual and ordinary sense," S. Union Co., 941 N.E.2d

at 640, requires an offset for tax prepayments to be read into the

agreement.    In SRS's words, there can be no indemnifiable "Losses"

arising from KOR's taxes if KOR has already "actually paid, and

thereby discharged, all or part of any such Taxes."12

             SRS   may   be    correct   that,    once   KOR's    fictional   tax

liability for 2011 is determined, the fictional part of the

calculation is complete and the amount owed to Mercury is intended

to be determined as it would be in a typical indemnification

scenario.    Ordinarily, KOR's tax debt and, in turn, Mercury's out-

of-pocket "loss," would be reduced by the amount of the prepayments

and credits.       However, it may be that the parties did not intend

the word to be read in this way. In fact, supporting the conclusion

that they intended the word to be read without regard to offsetting

prepayments, the language in section 10.01 on which SRS relies is

followed by the "Notwithstanding" proviso, which instructs that,

regardless    of    "any      other   provision    of    this    Agreement,   the

determination of the Taxes with respect to this Section 10.01 will

be calculated without taking into account any deductions described

12   The district court generally agreed with this construction,
though   it   emphasized   the   plain   meaning   of   the   word
"indemnification." In the court's view, the dictionary definition
of the term shows that indemnification requires a pre-existing
loss. Because it believed Mercury's loss was reduced by the amount
of the tax refunds, the court reasoned that $1.76 million must be
offset.

                                      - 18 -
in Section 10.05 below." This sentence appears to say that neither

the   general     indemnity   obligation     just    stated,   nor       any   other

provision    in    the   agreement,    negates      the   unusual    arrangement

specified in section 10.02(a), i.e., that Mercury is owed an amount

to be calculated by reference to a fictional tax liability.

             Of course, the "Notwithstanding" sentence does not by

its terms exclude the possibility that the ordinary concept of

loss was intended in section 10.01 and thus was meant to be applied

to    the   fictional     liability,   requiring      a   deduction       for    the

prepayments     and    credits.   It    is   also    plausible      to    read   the

"Notwithstanding" caveat as recognizing and reinforcing a distinct

method of calculating the "indemnification" obligation for the

not-yet-completed 2011 taxes due, disregarding the usual method of

determining a "loss."          Indeed, as we have described, section

10.02(a) creates both a tax liability and thus an indemnification

obligation where none in fact existed because of KOR's financial

circumstances.        That explicit fiction belies the inevitability of

the parties' intention to apply a literal concept of "loss" to

calculate the 2011 tax indemnification amount.                 See Mass. Mun.

Wholesale Elec. Co. v. Town of Danvers, 577 N.E.2d 283, 294-95

(Mass. 1991) (recognizing that plain meaning does not control where

context shows that the parties have assigned an unusual meaning to

a term).

                                   - 19 -
               To the contrary, while section 10.01 as a general matter

imposes responsibility on the securityholders for possible tax

"Losses" resulting from future IRS audits, including for 2011, the

section can reasonably be read to identify SRS's "indemnification"

obligation at the time of the merger as the amount specified in

section 10.02(a) -- without accounting for the prepayments and

credits.       The parties' sophistication and the obviousness of the

refund issue makes it unlikely that, given the section 10.02(a)

fiction, they would have hidden the answer to the refund question

between the lines of section 10.01. Again, the absence of explicit

reference to the anticipated refunds leaves the parties' intent

unclear.

               In sum, given that section 10.02(a) appears to use the

tax liability context as a way to define a price adjustment -- and

calls    for    a   transfer   of    funds   that   ordinarily    would     not   be

described as an "indemnification" -- we have no confidence that

the parties intended the ordinary calculation of "loss" to apply.

We thus find no decisive guidance on the meaning of section

10.02(a) in the plain language of section 10.01.

B. Other Arguments

        The    parties   offer      multiple    theories     to   support    their

competing       contentions    that    the     intent   of   section   10.02      is

discernible from the provision's plain language.                  These theories

                                       - 20 -
are largely fact-dependent and, hence, require judgments based on

fact-finding that we cannot do.

     SRS, for example, argues that KOR's tax refund must offset

Mercury's recovery lest Mercury receive what it calls a double

recovery, or a "windfall by recovering some amounts twice."      As

noted above, SRS believes that no refunds would have been paid

absent the deductions.   Because KOR's 2011 tax refunds are part of

the benefit of the merger-related tax deductions, SRS argues, they

must be counted against the former securityholders' indemnity

obligation.    To allow Mercury to claim KOR's 2011 tax refunds

(worth $1.76 million), and the full $2.4 million value of the tax

deductions without an offset, would give Mercury $1.76 million

twice.13   However, whether the refunds are solely attributable to

the merger is a disputed fact that cannot be determined on the

limited record before us.   Moreover, this argument has force only

if the parties in fact intended to define the total amount due to

Mercury by the net benefit from the merger-related deductions.   As

we have explained, the agreement does not plainly limit the

"indemnification" payment to that amount.

13   The district court found this argument persuasive.         It
reasoned that Mercury "received the economic benefit it bargained
for -- which is the 'benefit of the 10.05 deductions.'" It further
observed that "[t]he 'benefit' of the tax refunds resulting from
10.05 deductions" and the "'economic benefit of the 10.05
deductions,' . . . are, in financial reality, overlapping."

                              - 21 -
     Mercury, meanwhile, asserts that it bargained separately for

the tax refunds and the tax indemnification provisions.                     It

supports this assertion with drafts of the merger agreement and

associated   correspondence       to    and    from   its     counsel   during

negotiations.   [Mercury Br. 6-7.]            However, we may not consider

such evidence in our review of a judgment on the pleadings, as

these materials are not fairly incorporated in the pleadings or

susceptible to judicial notice, see R.G. Fin. Corp., 446 F.3d at

182, and Mercury cites no other basis on which they may be

considered.14

                                       IV.

           Although there are elements of reasonableness in both

parties'   arguments,   neither    party      succeeds   in   clarifying   the

14   Mercury also makes another argument based on negotiating
history. According to Mercury, KOR had substantial net operating
losses (NOLs) from past years, which it had carried forward in the
hope of reducing its taxable income in a future year. However,
the NOLs could not be carried forward post-merger because section
382 of the Internal Revenue Code ("I.R.C.") does not allow Mercury
as KOR's new owner to take advantage of them. To compensate for
the lost value of KOR's NOLs, according to Mercury, "the parties
negotiated for a cash payment to Mercury in an amount equal to the
Tax benefit Mercury would have received had there been no
limitation on the use of accumulated NOLs." Mercury claims that
this amount is $2.4 million, and that if KOR's prepayments and
credits are offset, it will get less than the tax benefit of the
accumulated NOLs, and thus less than it bargained for.       Again,
however, Mercury's claims are not reflected in the text of the
merger agreement. Nor does Mercury explain how it calculates the
tax benefit it would have received if it had been permitted to use
KOR's accumulated NOLs. We are left with no explanation to connect
the NOLs -- allegedly made useless by I.R.C. § 382 -- to the
conclusion that Mercury was owed $2.4 million rather than $640,000.

                                  - 22 -
meaning of the merger agreement with respect to the offset issue.

On this point, sections 10.01 and 10.02 are inescapably ambiguous;

"reasonably intelligent persons would differ as to which meaning

is the proper one."    S. Union Co., 941 N.E.2d at 640 (quoting

Citation Ins. Co., 688 N.E.2d at 953).

          This ambiguity is remarkable given the sophistication of

the parties.   Mercury and the former owners of KOR agreed to a

seemingly novel contract provision, incorporating elements of an

indemnity and a purchase price adjustment.   Although the parties

knew that KOR had tax prepayments and credits and anticipated a

2011 tax refund, they failed to clarify how these prepayments and

credits would affect the indemnification provision.   Indeed, the

failure to speak expressly to the issue suggests that the parties,

inexplicably, may have neglected to address how the refunds would

be handled.    Having thus agreed to an ambiguous contract, the

parties now must shoulder the costs of additional litigation in

the district court to clarify its meaning, through consideration

of negotiating history and other extrinsic evidence probative of

the intentions of the parties, consistent with Massachusetts law.

See Den Norske Bank AS, 75 F.3d at 52-53.

          We vacate judgment in favor of SRS, affirm the denial of

judgment to Mercury, and remand to the district court for further

                             - 23 -
proceedings consistent with this opinion.15   Each party shall bear

its own costs.

          So ordered.

15   Of course, these additional proceedings could be avoided if
the parties settle this case. We urge them to seriously explore
that possibility. Settlement counsel of the First Circuit stands
ready to assist them in this effort.

                              - 24 -
                       Appendix

     Excerpts from the Agreement and Plan of Merger:

     Section 10.01. Tax Indemnification. From and after
the Closing Date, each Securityholder shall . . .
indemnify and hold harmless [Mercury] from, against and
in respect of any and all Losses that constitute or that
result from, arise out of or relate to, directly or
indirectly [] Taxes (or the non-payment thereof) of
[KOR] for all Pre-Closing Tax Periods . . . .
Notwithstanding any other provision of this Agreement,
the determination of the Taxes with respect to this
Section 10.01 will be calculated without taking into
account any deductions described in Section 10.05 below.

     Section 10.02. Tax Return Preparation.

               (a) [SRS] shall cause to be prepared
     (and [Mercury] shall cause to be subsequently
     filed) in a timely manner all Tax Returns related
     to Pre-Closing Tax Periods (other than Tax Returns
     for a Straddle Period) which are required to be
     filed by [KOR], to the extent such Tax Returns are
     due after the Closing Date. . . . With respect to
     any such Tax Return filed after the Closing Date
     that relates to any Pre-Closing Tax Period and upon
     the request of [SRS], the Escrow Agent shall make
     a distribution from the Escrow Amount to [Mercury]
     three (3) days prior to the filing of such Tax
     Returns the amount of the aggregate Tax liabilities
     due, if any, with respect to such Pre-Closing Tax
     Periods; provided, however, that for purposes of
     determining the Tax liability due with respect to
     such Tax Return for purposes of calculating the
     Securityholders' indemnification obligations, the
     determination of the Tax liability for any such
     Pre-Closing Tax Period will be calculated and
     determined excluding any deductions described in
     Section 10.05 below. The amounts actually due on
     the Tax Return (after giving effect to any
     deductions described in Section 10.[0]5 below)
     shall promptly be paid by [Mercury] to the
     appropriate Governmental Authority. . . .

     . . .

                        - 25 -
Section 10.05. Allocation of Certain Expenses

          (a) Any Company Transaction Expenses,
to the extent not required to be capitalized and
included in [Mercury's] tax basis of the [KOR]
stock and to the extent otherwise permitted by
applicable Legal Requirements . . . shall be
claimed as deductions for the Pre-Closing Tax
Period ending on the Closing Date; and

          (b) To     the   extent   permitted    by
applicable Legal Requirements . . . any income tax
deductions attributable to payments due at Closing
to holders of Vested Options shall be claimed as
deductions for the Pre-Closing Tax Period ending on
the Closing Date.

                   - 26 -