Davis v. Dawson, Inc.

ORDER

SARIS, District Judge.

After hearing, I adopt the well-reasoned report and recommendation dated February 12,1998. I make only three brief comments.

First, Dawson objects to the magistrate judge’s recommendation that the sellers be granted summary judgment on Counterclaim V, which asserts that the sellers breached Section 2.11 of the Stock Purchase Agreement relating to tax claims by the Japanese, Canadian, and Massachusetts authorities. The heart of this breach of contract claim is laid out in the October 11, 1996 set-off letter (Appendix 608-621) in which Dawson demands indemnification as a result of damages arising from the breaches of representations and warranties made in the Stock Purchase Agreement and Schedules. Specifically, Dawson sought indemnification for all unpaid taxes, stated it would set off $29,185 for the settlement of unpaid taxes owed to the Japanese tax authority, and reserved the right to set-off those amounts of unpaid taxes due to Massachusetts and Canada when they become more “precisely determinable.”

In my review of the defendants’ brief (Docket No. 357) and the pleadings, Dawson never expressly raised before the magistrate judge the present claim that a breach of warranty as to potential future tax liability at the time of the Stock Purchase Agreement had an adverse impact on the value of Faxon, as measured by the difference between the purchase price and the actual value of Faxon. Her voluminous opinion which discusses in meticulous detail each and every claim doesn’t discuss this theory of breach of contract, and correctly in my opinion, analyzes the set-off claim articulated in the October 11, 1996 letter. At the hearing, I asked Dawson to point to any place in the extensive pleadings where this issue of diminution of the value of Faxon resulting from a breach of warranty on unpaid taxes at the time of the agreement had been expressly raised. The letter from counsel, dated March 26, 1998, does not do so, but concedes the summary judgment record was incomplete on this point. Accordingly, with respect to Counterclaim V, the issue of diminution of value has not been fairly presented or preserved.

Second, with respect to Plaintiffs objection 16,1 agree that the relevant time for assessing the accuracy of the warranty in Section 2.4 is July 29, 1994. However, I wait until trial to determine whether any possible Ni-

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hon Faxon intercompany account loss could be “probable of occurrence” or “reasonably estimated” in light of the pending EBSCO offer on July 29,1994.

Third, as stated at the hearing, plaintiffs may press a claim for a breach of the duty of good faith and fair dealing.

REPORT AND RECOMMENDATION RE: PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGMENT (DOCKET ENTRYém &

315);

1

DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT (DOCKET ENTRY #257)

Feb. 12, 1998.

BOWLER, United States Magistrate Judge.

Pending before this court are: (1) a motion for partial summary judgment (Docket En-tryé313 & 315) filed by plaintiffs Judy Davis (“Davis”) and BankBoston, N.A., formerly known as The First National Bank of Boston (“FNB”) (collectively: “plaintiffs” or “the sellers”); and (2) a motion for partial summary judgment (Docket Entry # 257) filed by defendants Dawson, Inc. (“Dawson, Inc.”) and Dawson Holdings PLC (“Dawson PLC”) (collectively: “Dawson” or “the buyer”). The latter motion references four, separate supporting memorandum.

2

Each memorandum addresses a particular subject matter and includes a separate statement of undisputed facts.

Where, as here, there are cross motions for summary judgment, this court treats each motion separately and assesses the factual record differently depending on which party is the nonmovant and which party bears the underlying burden of proof at trial. Disputes as well as mere allegations set forth in the factual background are readily apparent.

3

It is in the discussion section wherein this court resolves the factual disputes in favor of the nonmoving party to the extent necessary to resolve a summary judgment motion.

4

The standard of review of a summary judgment motion is well established.

“Summary judgment is appropriate when ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.’ ”

Barbour v. Dynamics Research Corporation,

63 F.3d 32, 36-37 (1st Cir.1995),

cert. denied,

516 U.S. 1113 , 116 S.Ct. 914 , 133 L.Ed.2d 845 (1996) (quoting Rule 56, Fed.R.Civ.P.). “ ‘[Ejvidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his [or her] favor.’ ”

Rogers v. Fair,

902 F.2d 140, 143 (1st Cir.1990) (citation omitted). Furthermore, it is particularly apropos to the case at bar, to acknowledge that credibility issues are not the proper subject of a sum

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mary judgment motion. In general, the role of a summary judgment motion “is to pierce the boilerplate of the pleadings and assay the parties’ proof in order to determine whether trial is actually required.”

Coyne v. Taber Partners I,

53 F.3d 454, 457 (1st Cir.1995).

“As to issues on which the summary judgment target bears the ultimate burden of proof, she [or he] cannot rely on an absence of competent evidence, but must affirmatively point to specific facts that demonstrate the existence of an authentic dispute.”

McCarthy v. Northwest Airlines, Inc.,

56 F.3d 313, 315 (1st Cir.1995).

Once the moving

party makes a proper showing as to the “ ‘absence of evidence to support the nonmoving party’s case,’ the burden of production shifts to the nonmovant,”

Dow v. United Brotherhood of Carpenters,

1 F.3d 56, 58 (1st Cir.1993) (citation omitted), who may not rest on allegations in his briefs,

Borschow Hospital & Medical v. Cesar Castillo,

96 F.3d 10, 14 (1st Cir.1996), or, as in the present case, allegations in a brief with inaccurate and, thus, irrelevant citations to the deposition testimony.

See also

LR. 56.1.

5

FACTUAL BACKGROUND

On October 4, 1994, Davis and FNB, Trustee of the Albert Davis Trust, as the sellers, and Dawson, Inc., as buyer, executed a Stock Purchase Agreement (“the agreement” or “the stock purchase agreement”) for the sale of The Faxon Company, Inc. (“Faxon”). Under the agreement, the sellers agreed to sell all of Faxon’s outstanding shares of stock to Dawson, Inc. for the purchase price of $14,000,000. The method of payment was for Dawson, Inc. to pay the sellers $3,000,000 in cash at the October 20, 1994 closing and the remaining $11,000,000 in seven annual installments as reflected in certain promissory notes (“the notes” or “the promissory notes”).

Faxon, which began as a family owned business in 1918, is in the subscription service business. Based in Westwood, Massachusetts, the company manages subscriptions for libraries, universities and other institutions with large periodical subscription needs. More- specifically, Faxon accepts orders for periodicals from its customers and then forwards the orders, oftentimes with payment, to various pubJisher[s]. Faxon bills its customers for the subscriptions as well as service charges. Faxon’s customers often prepay Faxon for their subscriptions which will then arrive in the following calendar year.

In early 1994 Faxon’s business consisted of its operations in Westwood (“Faxon domestic” or “Faxon Westwood”), two North American subsidiaries (The Turner Subscription Agency, Inc. (“Turner”) and Faxon Canada Limited (“Faxon Canada”)), seven European subsidiaries (“the European subsidiaries”) and a number of foreign operations and subsidiaries in Latin America, the Middle East and the Asia Pacific region (“the nonEurope-an subsidiaries”).

In the early 1990s Faxon’s business began to decline and the company began experiencing significant losses. (A.232-233).

6

In or around Faxon’s 1993 fiscal year,

7

Chemical Bank declined to renew Faxon’s line of credit which covered the company’s high seasonal demands for cash during certain periods of the year.

8

(A. 231; S.A. 76; P. 25). According to Jonathan S. Altman (“Altman”), the

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owner of Altman & Company and a financial turnaround consultant for businesses, Faxon unsuccessfully contacted a number of other banks for loans in early 1994.

9

(P. 28).

In or around this time period, a series of investments had also proven unproductive and Faxon became unable to pay certain publishers in a manner consistent with its past payment history. (A. 231-232; P. 28). Discussions noted in the minutes of Faxon’s March 14, 1994 Board of Directors meeting cite to “traumatic losses” and the depletion of equity resulting from payments to Judy Davis’s former husband, Richard Rowe. As a result, at the March 14, 1994 meeting, the Board of Directors (“the board”) of Faxon voted to authorize Altman to explore selling Faxon, in whole or in part. (P. 251). Davis supported this decision. (S.A.146).

Similarly, the draft consolidated financial statements for Faxon and its subsidiaries for the years ending March 31, 1994 and 1993, prepared by Deloitte & Touche, L.P. (“De-loitte”), Faxon’s auditors, showed respective net losses of $8,330,692 and $7,893,917. (P. 25 & 104). These financials additionally reference Faxon’s default on principal payments to various publishers and question Faxon’s ability to continue operating as a “going concern.” (P. 104).

In sum, by the spring of 1994 Faxon’s financial condition had deteriorated to the point where it was seriously exploring and considering the option of selling all or part of the company.

10

Indeed, by letter dated April 19, 1994, Dawson PLC indicated a willingness “to pay up to $25 million”

11

for Faxon’s European operations, subject to “full due diligence” and a contract “with the usual warranties.”

12

(P. 47). While Dawson PLC was considering a bid for Faxon’s European operations, Faxon provided Dawson PLC with certain financial information. (A.669). The record is disputed with respect to the extent and the content of this disclosure of financial information in the spring of 1994.

13

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Faxon supplied the financial information to Dawson PLC in the spring of 1994 subject to the terms of a confidentiality agreement. The confidentiality agreement allowed Dawson PLC access to the financial information, described as “Evaluation Material” in the confidentiality agreement, provided that Dawson used the material solely for the purpose of evaluating the purchase or acquisition of Faxon. In the event Dawson PLC abandoned the prospective transaction, Dawson PLC agreed to redeliver the financial information to Faxon or to destroy the financial information without retaining copies. (A. 409M10; A. 669-670; S.A. 100).

By letter dated May 9, 1994, Dawson PLC made an offer (subject to meeting with Fax-on creditors, conducting due diligence and standard warranties) to purchase Faxon and its subsidiaries for $6.8 million. (P. 50). The May 9, 1994 letter referred to additional financial information received the previous week and also reconfirmed Dawson PLC’s interest in buying Faxon’s European operations for an amount in the range of $12 to $15 million. (P. 50).

Meanwhile, by letter dated April 28, 1994, EBSCO Industries, Inc. (“EBSCO”) offered Faxon $18 million in cash for Faxon. (P. 49 & 51). Although, according to plaintiffs Fax-on did not accept EBSCO’s offer (Docket Entry #317, p. 6), plaintiffs point out that Dawson Subscription Services sent a May 11, 1994 letter to the Federal Trade Commission (“the FTC”) complaining that EBSCO’s acquisition of Faxon would be anticompetitive.

14

(P.53; S.A. 39-40).

On May 20, 1994, Dawson PLC offered to pay Faxon $17.5 million for 40% of the capital stock of Faxon domestic and 100% of the capital stock of its subsidiaries subject to various adjustments and due diligence review.

15

(P. 55 & 57). In a report dated May 25, 1994, Connolly reviewed the costs associated with buying Faxon and attached certain financial information relative to Faxon. (P. 56; P. 16, pp. 29-30, vol. IV). The report, which analyzes Dawson purchasing 100% of Faxon’s subsidiaries and 40% of Faxon, Inc., contains financial data as of March 31, 1994, for Faxon Westwood as well as for Faxon’s European operations and Faxon Canada.

16

(P. 56).

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Ingleby characterized Dawson PLC’s efforts in the spring to acquire Faxon’s European operations as a “totally different acquisition” from Dawson, Inc.’s acquisition of Faxon and its nonEuropean operations in October 1994.

17

Ingleby also failed to recollect viewing financials involving Faxon in May of 1994. (A.196).

In short, Dawson PLC’s attempts in the spring of 1994 to acquire all or part of Faxon proved unsuccessful. The record is disputed as to exactly what documents Faxon provided Dawson and what documents Dawson reviewed relative to Faxon in the spring of 1994. Moreover, even viewing the record in plaintiffs’ favor, Dawson PLC’s focus and the nature of the proposed transactions in the spring of 1994 differed from its focus in the early fall of 1994 inasmuch as in August 1994 Faxon sold its European operations to another company.

On May 31, 1994, EBSCO made additional offers for Faxon’s United States and non-United States operations. (P. 59 & 60). Also on May 31,1994, R.R. Donnelley & Sons Company (“Donnelley”) made an offer, subject to signing a definitive agreement, to purchase the domestic business of Faxon as well as Turner, Faxon Canada and certain Asian/Paeific operations. (P. 61). Davis accepted the offer. (P. 61). Faxon eventually terminated its discussions with Donnelley, however, as shown in Faxon’s August 5,1994 board minutes. (P. 251). As also shown in these minutes, Faxon considered liquidation as an option at that point in time but resolved to proceed with another offer from EBSCO. (P. 251; A. 181).

According to Altman, by the spring and early summer of 1994 Faxon’s publishers took the position that Faxon had to sell all or

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part of the company.

18

(P. 28). After the Donnelley transaction fell through, Altman began talking with Swets Zeitlinger, B.V. (“Swets”) about selling Faxon’s European operations. Thereafter, in a short period of time, Faxon consummated a deal with Swets in late July or early August of 1994 whereby Swets agreed to purchase Faxon’s European subsidiaries. (P. 28).

Meanwhile, in July 1994 Faxon was in ongoing discussions with EBSCO about selling Faxon’s United States (“U.S.”) operations and/or Turner, Faxon Canada and non-U.S. subsidiaries. (P. 28 & 63). Dawson also remained in the negotiations and in early August 1994 received updated financial statements regarding Turner and Faxon Canada. (P. 65, 67 & 68). By facsimile transmission dated August 3, 1994, Ingleby transmitted a three sentence letter to Altman reminding him that, “Dawson is available as a back stop with cash available and a willingness to negotiate a better price than we previously discussed.”

19

(P. 67). On August 5, 1994, Dawson offered to pay Faxon $11 million for Turner and Faxon Canada. (P. 69-71).

EBSCO also made an offer to purchase Turner, Faxon Canada and Faxon’s remaining foreign subsidiaries, including Nihon Faxon Company Limited (Japan) (“Nihon Faxon”), on August 5, 1994. Specifically, EBSCO offered to pay Faxon $16.5 million for these entities subject to conducting due diligence and executing a mutually acceptable final contract. The offer also noted, “[W]e understand that [Faxon] will provide us an exclusive to negotiate on the balance of the Company.” Davis and Altman signed the offer.

20

(P. 74). On August 8, 1994, Faxon’s agreement to sell Turner, Faxon Canada and its remaining foreign operations to EBSCO was announced to the press. (P. 75). The signed offer to purchase letter was due to expire within ten business days (August 19, 1994) in the event the parties failed to finalize a purchase agreement.

21

(P. 74).

During August 1994 Dawson continued to negotiate with Faxon to acquire Faxon’s domestic operations. By letter dated August 23, 1994, after expiration of the aforementioned EBSCO/Faxon exclusive, Connolly advised Altman of Dawson’s “confirmed interest” in acquiring various parts of Faxon, including Turner and Faxon Canada. (P. 77). Connolly’s letter closed with the statement that, “Our offer would be an all-cash offer for 100% of the stock of Faxon, Inc., including all remaining unsold subsidiaries.”

22

The letter did not include a price range for the proposed transaction. (P. 77). At this time, Zuroff also sent a facsimile transmission to Connolly of financial information of Faxon for July 1994. Connolly then sent the materials by facsimile transmission to Cain.

23

(P. 78 & 83).

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Also on August 24,1994, EBSCO transmitted to Faxon an offer to purchase “all of the equity of the parent” for $11 million. (P. 79). In a separate August 24, 1994 transmission, EBSCO reconfirmed its prior offer of $16.5 million for Turner and Faxon’s non-U.S. subsidiaries, including Nihon Faxon. (P. 80).

On August 25, 1994, Connolly sent a letter to Altman confirming Dawson’s “intention to make a bid for 100% of the stock of Faxon, Inc. within the price range mentioned” in an earlier telephone conversation.

24

(P. 81). The letter further noted that, “this offer does not include Faxon Canada, Turner, Latin America or Asia Pacific.” Connolly then confirmed that it was Dawson’s “intention to proceed with this offer in its entirety, including the above subsidiaries, in the event that the proposed sale of same should fall through for whatever reason.”

25

(P. 81).

By letter dated August 25, 1994, Connolly informed Zuroff and Altman that he, together with Cain, intended to visit Faxon in Westwood on August 30, 1994. In connection thereto, Connolly expressed an interest in reviewing,

inter alia,

financial statements for all Faxon subsidiaries and balance sheets vis-a-vis the aging of accounts receivables and the “collectability” of intercompany receivables. (P. 82).

Connolly and Cain reviewed financial information of Faxon during their visit to the Westwood headquarters in late August 1994 and September 1, 1994. (P. 18). Connolly testified, in part, that he initially met with Zuroff and that, “In large part [the material requested in the August 25, 1994 letter] was not made available because it wasn’t available within the company.” (P. 16, p. 182, vol.I). As demonstrated below, the testimony regarding the extent and content of Dawson’s review of financials in August and September 1,1994, is disputed.

Zuroff testified that he presented Connolly with a series of binders containing financial information during the late August 1994 visit. According to Zuroff, the binders would include legal ‘ and operational organization charts. Zuroff additionally testified that he provided Connolly with financial statements for all Faxon subsidiaries, including Nihon Faxon, and that Connolly reviewed accounts receivable. It was also Zuroffs practice to provide all potential buyers such as Dawson with the July 21, 1994 draft of Faxon’s consolidated financials (“the July consolidated financials” or “the July 1994 consolidated financials”) (P. 64)

26

or an iteration thereof.

27

(P. 21, pp. 68-72 & 147-150, vol. III).

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Zuroff also recalled discussing Nihon Fax-on’s intercompany balance with Connolly pri- or to the October 1994 closing. In fact, Zuroff characterized Nihon Faxon as the “single largest issue, aside from receivables, which” he talked about with Connolly. (P. 21, pp. 152-153, vol.HI). Furthermore, Connolly testified at one point that the cash flow projection provided by Faxon in August 1994 showing a full pay down of the intercompany receivable from Nihon Faxon was not a misrepresentation. (P. 16, pp. 266-268, vol.II).

On August 31,1994, EBSCO sent a facsimile transmission to Davis withdrawing its offer to purchase all of the equity of the parent for $11 million.

28

(P. 86). The communication nevertheless confirmed that progress was still being made on “the non-USA/Turner acquisition” and urged that the parties must enter into a “common letter” by September 2, 1994, with a closing by September 15,1994. (P. 86). By facsimile transmission of a letter dated September 1, 1994, EBSCO informed Davis that it was terminating “its consideration of the acquisition of [Faxon’s] non-USA operations and Turner.”

29

(P. 87).

Whether Dawson knew about the withdrawal of the EBSCO acquisition prior to entering into its own letter of intent to acquire Faxon’s domestic operations (P. 85; S.A. 459-465) on August 31,1994, is disputed. Notwithstanding the later date of the September 1, 1994 EBSCO withdrawal letter, Cain testified that on August 31, 1994, Altman advised both him and Connolly that “EBSCO may withdraw its offer.”

30

Cain could not, however, remember whether Altman told him of the EBSCO withdrawal pri- or to the signing of Dawson’s letter of intent. (P. 18, pp. 33-35, vol.HI). Connolly testified that “there was a hypothesis on the part of Mr. Altman that as a result of [Dawson’s] bid EBSCO might withdraw their bid.”

31

(P. 16, pp. 48^9, vol.IV).

It is undisputed that on August 31, 1994, Dawson and Faxon accepted and agreed to Dawson’s letter of intent to acquire Faxon’s remaining domestic operations for $15 million cash and forgiveness of an estimated $2.2 million debt owed to Faxon by Davis.

32

(p. 85;

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S.A. 459-465). The letter of intent included an attached domestic balance sheet showing the projected balance of the Nihon Faxon intercompany debt reduced to zero as of August 31,1994. (S.A.465).

On September 1, 1994, EBSCO issued a press release announcing its decision to terminate its consideration of acquiring Faxon’s “non-US operations” and Turner. (P. 88). Due to EBSCO’s withdrawal, Faxon would not receive the anticipated proceeds from the $16.5 million transaction. Dawson was aware of the proposed EBSCO sale prior to entering into the letter of intent and Connolly understood that Faxon planned to apply the proceeds of the EBSCO sale to discharge Faxon’s debt to its publishers. (P. 16, pp. 138-140, vol. Ill; A. 138 & 153).

By September 1 or 2, 1994, Dawson had learned about EBSCO’s withdrawal. (A. 153; P. 90). Dawson thus reevaluated its position with respect to its offer to purchase the domestic operations. According to Connolly, Dawson was troubled that the cash from the EBSCO sale would no longer be available to pay Faxon’s publishers’ debt. Although concerned about the lack of time to adequately investigate the remaining foreign subsidiaries, Dawson agreed to acquire Faxon’s remaining foreign subsidiaries as well as the domestic operations and made a public announcement to this effect on September 2, 1994. (P. 90; A. 154).

■ Dawson did not significantly reduce the $15 million purchase price contained in the letter of intent when it agreed to add the remaining foreign subsidiaries to the proposed transaction.

33

Connolly testified that the parties came to a different agreement to defer payment of the purchase price in light of Dawson’s concern about the absence of cash resulting from the EBSCO withdrawal and Zuroffs assurance, described

infra,

that the subsidiaries would not effect the company’s net worth. (A. 154; P. 16, pp. 146-151, vol. III). During September 1994 the agreement thus evolved to provide for an $11 million deferred payment of the purchase price. (P. 16, pp. 149-150, vol.III). In a September 27, 1994 report to the Dawson PLC board Ingleby described the deferred payments as “an earn-out/consultancy/non compete of up to $12m spread over 7 years.”

34

(P. 136; P. 17, pp. 124-125, vol. II). In the final agreement, the payment schedule included an initial cash payment of $3 million and the later installment payments totaling $11 million. The final agreement also included a purchase price adjustment mechanism. (P. 1).

On September 6 or 7, 1994, Ingleby and Connolly met with one or more representatives from Reed Elsevier, Inc. (“Elsevier”), a major Faxon publisher. (P. 17, pp. 157-158, vol. II; A. 138; P. 16, p. 197, vol. I; P. 18, pp. 42-48, vol. I). Dawson desired assurances from Elsevier that it would resume normal trading terms with Faxon after Dawson’s acquisition. Dawson additionally sought reassurance that Elsevier would allow Dawson to proceed with the transaction. El-sevier was concerned about Dawson’s financial ability to complete the transaction. A facsimile transmission dated September 7, 1994, from Ingleby to Zuroff refers to the Elsevier meeting and requests “a cash flow analysis,” referenced by Elsevier at the meeting. A September 7, 1994 facsimile transmission by ZurofPs secretary reflects that she transmitted the July consolidated financials to Ingleby. Dawson’s meeting

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with Elsevier concluded on a cordial note, according to Ingleby. (P. 17, pp. 158-160, vol. II; P. 91; P. 16, p. 150, vol. II; P. 94; P. 16, pp. 197-202, vol. I).

In September 1994 Elsevier, as well as other publishers, continued to pressure Fax-on for payment of its outstanding debt. At least in part due to Elsevier’s demands, Dawson and Faxon agreed to a separate and expedited sale of Turner and Faxon Canada. On or about September 20,1994, Dawson and Faxon entered into stock purchase agreements whereby Dawson purchased Turner and Faxon Canada for the aggregate total of $7.5 million.

35

The $7.5 million proceeds were transferred directly to Faxon publishers. (P. 109; P. 16, pp. 127-128, vol. I; P. 16, pp. 170-178, vol. Ill; P. 76 & 110; A. 107 & 158).

Connolly traveled to the Boston area on September 12, 1994, returning to the United Kingdom on September 15, 1994.

36

During this visit, Connolly discussed with Zuroff the preparation of revised cash flow statements in light of the EBSCO withdrawal. He also reviewed the broad assumptions contained in the cash flows which were then used to obtain financing for Dawson. (A. 127-128; A. 156; P. 16, pp. 224-225, vol. I).

According to Connolly, he asked Zuroff for financial statements relative to Nihon Faxon a number of times. Connolly testified that in September 1994 he reviewed certain financial documents

37

but that there were no relevant or updated financial statements regarding Nihon Faxon for review. (P. 16, pp. 230, Yol. I; A. 162). The extent of Connolly’s review of Faxon’s financials both before the EBSCO withdrawal when Dawson was acquiring the domestic operations and after the EBSCO withdrawal when Dawson was also acquiring the remaining subsidiaries is disputed. At a minimum, although Connolly initially stated in answer to interrogatories that the interim balance sheet was the only financial information made available by the sellers, he acknowledged at his subsequent deposition that he had seen a copy of Faxon’s monthly consolidated report as of June or July 1994 prior to the EBSCO withdrawal. (P. 16, pp. 184-185, Yol. IV; P. 16, p. 231, Vol. I; P. 11, Int. 22). In addition, Zuroff testified that he provided “Dawson” with a copy of “the July consolidating financials” showing negative equity for Nihon Faxon as well as Asia Pacific.

38

Zuroff also testified that, prior to the

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closing, he provided Connolly or Dawson with all of the financials which Nihon Faxon would have submitted to Faxon. (P. 21, pp. 83-85, vol. IV; P. 21, p. 100, vol. II; p. 113).

The September 20, 1994 preliminary version of Faxon consolidated financials as of August 31, 1994, is also marked “Dawson” and shows Nihon Faxon’s net worth as negative $2,953,737 and a Nihon Faxon negative intercompany liability of $8,107,329 for Fax-on domestic. A September 16,1994 facsimile transmission from Zuroff to Connolly refers to attached financial proformas.

39

A September 23, 1994 facsimile from Dawson

40

contains financial projections for Faxon, referencing as a source Faxon’s “Projected Consolidated Financials” dated July 21,1994.

It is also undisputed that on September 16, 1994, the July 1994 consolidated financials were faxed from Faxon to Attorney Leonard A. Ferber (“Ferber”) of Katten, Muehin

&

Zavis (“Katten Muehin”), Dawson’s counsel in 1994 and Assistant Secretary to Dawson, Inc. as of August 31, 1994.

41

In addition, by letter dated September 26, 1994, Adam H. Schecter (“Schecter”) of Katten Muehin filed Dawson’s Hart Scott Rodino filing with the Federal Trade Commission.

42

Therein, Schecter refers to Faxon’s $8 million loss through July 31, 1994. Dawson thus acknowledges, albeit not until answering an interrogatory in January 1997, that it is likely that it had the July 1994 consolidated financials in its possession prior to the closing. (P. 114; P. 128; P. 123; P. 130; P. 113; P. 20, pp. 7-8, 22-33 & 115-116, vol. I; S.A. 171-172; S.A. 169e-169f; Docket Entry # 356, p. 39; P. 14).

Finally, a September 26,1994 letter signed by Connolly to an individual at Fleet Bank includes Faxon’s September 1994 Projected Consolidated Financials updated to reflect the sale of Turner and Faxon Canada to Dawson.

43

These financials show the com-

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píete pay down of Nihon Faxon’s intercompa-ny debt by June 30, 1995.

44

(P. 133; P. 16, pp. 112-115, vol. II).

On the other hand, Connolly testified that in September 1994 and up to the closing he was occupied with arranging financing for the transaction

45

and spent a significant amount of time arranging for a line of credit for the upcoming season from National Westminster Bank, Limited (“NatWest”), a clearing bank based in the United Kingdom.

46

Connolly also spent a considerable amount of time dealing with Faxon’s publishers and obtaining their acquiescence to the transaction.

47

Finally, almost on a daily basis in September 1994, Connolly spent time assuring Faxon customers of the safety of their subscription moneys. In light of these tasks, Connolly had less time to undertake a due diligenee review of Faxon.

48

He also characterized the review of Faxon financial reports as less important than the aforementioned duties, in part, because he could rely on the upcoming audits of the business as of September 30, 1994. The importance of the audit provision, i.e., the purchase price adjustment mechanism, to Dawson is evident by the fact that Connolly discussed the provision with Dawson’s board. (P. 16, pp. 154-159 & 179-181, vol. Ill; A. 129, 158 & 162).

Financial documents prepared before the closing show Nihon Faxon intercompany debt to Faxon of: (1) $10,444,000 as of July 29, 1994, and zero as of August 31, 1994; (2) $10,641,151 as of July 29,1994, and zero as of June 30, 1995; (3) $8,107,000 as of September 30, 1994, and zero as of June 30, 1995.

49

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(P. 64, 133 & 141). Another set of financial documents reflecting Faxon’s domestic balance has the date of June 27, 1994, in the lower right hand corner (“the June finan-cials”). These June financials show Nihon Faxon’s intercompany debt projected as: $10,840,000 as of March 31,1995; $10,340,000 as of June 30,1995; $5,816,000 as of September 30,1995; and $10,816,000 as of March 31, 1996.

50

(A.438-440).

In light of Nihon Faxon’s seasonal fluctuations, Zuroff explained that Nihon Faxon could realistically collect approximately $7,000,000 or perhaps $4,000,000 to $5,000,-000 of the receivables. As further explained by Zuroff, however, Faxon would later pay publishers on Nihon Faxon’s behalf thereby increasing Nihon Faxon’s intercompany debt. (P. 21, pp. 119-121, vol. IV; P. 21, pp. 75-77, vol. VI). According to Zuroff, he explained to Connolly the difficulty in bringing the Nihon Faxon intercompany balance down to zero and that it was not “realistic to make that assumption in the time frame that was indicated in the forecasts.”

51

(P. 21, pp. 124-125, vol.IV).

Connolly, however, testified that Zuroff assured him that there were “back-to-back receivables” and that the Nihon Faxon “inter-company receivable would be paid down as the external receivables were collected by Nihon Faxon.” Connolly recalls viewing cash flow projections showing “all of the Nihon receivable being paid down over a period of time going into the next calendar

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year.” (A.131). He also avers that he saw more than one cash flow projection showing the complete pay down of the Nihon Faxon intercompany receivable. (P. 16, p. 248, vol. I; P. 16, pp. 126-127, vol. II; P. 16, pp. 165 & 167, vol. III; S.A. 111-112; A. 157; A. 166; A. 666, ¶ 3; P. 136; P. 141).

In a similar vein, Connolly testified that Zuroff stated that the impact of the additional subsidiaries “would not have an effect on the net worth of the company.” Connolly was also told on a number of occasions that the net worth of the newly added subsidiaries due to EBSCO’s withdrawal was a “wash”

52

and/or that effectively the net worth of the added subsidiaries was zero. According to Connolly, a subsequent audit of Faxon revealed that the aggregate net worth of the newly added subsidiaries came to a deficit of $4 to $5 million as of September 30, 1994. (A. 128; A. 154-155).

According to Zuroff, however, he spoke with' Connolly a number of times and advised him that by acquiring Asia Pacific in addition to Nihon Faxon that “all of Asia was close to a wash from a cash point of view” or that “Asia as a whole ... was approximately a wash in terms of cash flow” or that “when you acquire all of the foreign operations, it’s probably a wash.”

53

(P. 21, pp. 58 & 107, vol. VI; P. 21, pp. 116-117, vol. IV). He also spoke “at length” with Connolly about Nihon Faxon and denied ever saying that Nihon Faxon would pay down or repay the intercompany debt.

54

Zuroff also testified that he informed Connolly that Faxon “had a lot of difficulty getting information” from Nihon Faxon and that the company “had not been well managed over the years both operationally and financially.” (P. 21, p. 153, vol. Ill; P. 21, pp. 119-120, vol. IV).

Meanwhile, between September 1 and 13, 1994, Minoru Taguchi (“Taguchi”), President of Nihon Faxon (P. 24, p. 155, vol.2), spoke by telephone with an individual identified as Connolly and explained the “general situation” but “nothing specifically.”

55

(P. 24, pp. 168-178, vol.II). According to Connolly, it was after the closing that Zuroff told him that he didn’t know what was going on at Nihon Faxon.

56

(P. 16, pp. 166-167, vol.IV).

In light of these contrasting versions of events, therefore, whether Zuroff and/or the cash flow projections misrepresented to Connolly that the Nihon Faxon intercompany debt would be paid in full to Faxon is disputed. The circumstances surrounding Zuroffs “wash” statement are also disputed. More specifically, whether Zuroff limited the statement to cash flow or directed the statement to the net worth of the company is disputed.

With respect to the loss of one of Nihon Faxon’s major clients (Tsukuba University), Zuroff was aware of the Tsukuba University problem prior to the closing. (P. 21, pp. 90-91, vol.VI). An August 24, 1994 facsimile transmission correspondingly suggests that Faxon knew of the probable loss of the Tsu-kuba University account and of Taguchi’s 50% projected loss of Nihon Faxon’s sales volume.

57

(S.A. 40a-40b). In connection thereto, Faxon was discussing the option of recapitalizing Nihon Faxon’s intercompany

*85

debt to enable the company to successfully bid on the Tsukuba business.

58

(P. 21, pp. 85-90,vol. VI; P.89).

In fact, through a facsimile transmission dated September 1, 1994, Zuroff informed Taguchi that, pending an official board vote, Faxon “will recapitalize Nihon Faxon for the full amount of the intercompany debt.” (P. 89). Noting that the vote would increase Nihon Faxon’s equity by approximately $10 million, Zuroff concluded that he hoped “this will allow [Nihon Faxon] to win the bid with Tsukuba.” (P.89).

Sometime between September 1 and 14, 1994, Zuroff testified that a board minute dated June 30, 1994, was prepared.

59

(P. 21, p. 84, vol.VI). Davis could not recall the specifics of the meeting although she recollected that the meeting referred to in the June 30, 1994 minute took place in approximately August 1994. (A.175-176). Zuroff suspected that the minute was post dated and that the meeting did not actually take place on June 30,1994. (P. 21, p. 96, vol.VI). The minute, however, reads that, “A special meeting of the Board of Directors of the Faxon Company, Inc. was held ... on June 30, 1994.” (P. 105; A. 454(a)). Accordingly, there is a discrepancy as to the date of the meeting which took place prior to the closing.

The minute reflects that the Faxon board voted to convert $6 million of the Nihon Faxon intercompany debt into “additional paid in capital” effective immediately. (P. 105; A 454(a)).

60

The agenda for the meeting was Nihon Faxon’s intercompany debt and its ability to effectively bid on certain accounts. (P. 105; A. 454(a)).

Whether the minute books of Faxon contained this minute and whether Faxon made this minute available to Dawson is disputed. Connolly attests that the June 30, 1994 minute was not among the copies of minutes he reviewed which were kept at Faxon West-wood.

61

He also testified that he- did not see the minute before the closing. Moreover, the minute would have caused Connolly concern because it would contradict Zuroffs statement that the addition of the foreign subsidiaries was a wash and that the Nihon Faxon intercompany receivable was supported by back-to-back receivables. Connol

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ly also viewed the minute as significant inasmuch as it effected the cash flow projections showing the pay down of the Nihon Faxon intercompany debt. (P. 16, pp. 225-226, vol. Ill; A. 666, ¶ 4; A. 165).

It is also true that via a facsimile transmission dated September 8, 1994, Dawson’s counsel requested “all minutes” of the Faxon board “for the last five years.”

62

(A.527). A copy of the minute with Zuroffs signature intersecting the “S” of the word “Secretary” (A.455) contains a handwritten note with the words, “Mark Z. said hold!”. (P. 23, pp. 54-55, vol.I). Diana Brewer (“Brewer”), who provided general support to Zuroff and was also Assistant to the President at Faxon in 1993 and 1994 (P. 23, pp. 8-13, vol.I), recognized the handwriting on the note as her handwriting.

63

On the other hand, Brewer could not remember the actual instruction or why she was instructed to hold the note. Assuming that the instruction meant not to distribute the document, Brewer also did not know whether the instruction meant not to place the minute in the minute book. She does not remember anyone asking her not to put a minute in the minute book. (P. 23, pp. 53-55, vol.I).

In June 1994 Faxon kept a complete list of the board minutes in one place, a Pendiflex folder or minute book

64

in a fire safe file cabinet located outside the President’s office. For due diligence reviews, Zuroff testified that Faxon would create binders of financial materials containing an exhaustive list of board minutes. According to Zuroff, it was Brewer’s responsibility to keep the entire set of minutes in the minute book. (P. 21, pp. 96-98, vol. VI; P. 23, pp. 44-46, vol. I).

Although Zuroff could not recall whether he provided a copy of the June 30, 1994 minute to Connolly, he does remember discussing with Connolly the issue of recapitalizing Nihon Faxon by converting its intercom-pany debt to paid in capital as one of several options or approaches to retain Tsukuba University as a Nihon Faxon client.

65

Zuroff did not know or couldn’t be sure whether he told Connolly that, in fact, the board voted to recaptilize a portion of Nihon Faxon’s inter-company debt. Moreover, Connolly recalled that any discussions as to recaptilization took place after the closing. Brewer also could not remember whether the June 30, 1994 minute was included in the multitude of documents sent to Dawson. A student interning at the offices of Dawson’s counsel avers that the June 30, 1994 minute was not in the due diligence files produced by Fatten Muchin. (P. 21, pp. 85-87 & 98-99, vol. VI; P. 21, p. 138, vol. III; P. 21, pp. 104-105, vol. IV; P. 23, p. 56, vol. II; A. 981).

On September 13,1994, via facsimile transmission, Zuroff sent Taguchi a copy of the June 30,1994 minute. (P. 105). On September 14, 1994, Taguchi replied that Japanese law prohibited conversion of the intercompa-ny debt to paid in capital. Taguchi also referred to a Dawson press release signed by Connolly. (P. 111). As previously noted, Zuroff stated that he passed along to Connolly the facsimile transmissions sent to him by Taguchi. (P. 21, p. 87, vol.VI). Neither Zuroff nor Frank Neczypor (“Neczypor”), a tax partner at Deloitte who reviewed and consulted with Faxon on tax matters in late

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1993 and 1994, could recall whether Faxon implemented the action discussed in the June 30, 1994 minute, i.e., the conversion of $6 million of Nihon Faxon intercompany debt to paid in capital. In September 1994 Dawson was considering the option of closing or selling Nihon Faxon. (P. 26, pp. 15-16 & 119, vol. I; P. 21, pp. 100-103, vol. VI; P. 137; P. 11, Int. 15).

During the week of September 19, 1994, both Ingleby and Cain visited Faxon’s West-wood facility. They met with individuals familiar with Faxon’s research and development, product marketing and publisher and clients services departments. They also met with Altman and Davis. On September 20, 21 and 22, 1994, Ingleby and Cain traveled respectively to Faxon’s operations in New York, Faxon Canada in Ontario and Faxon facilities in Ann Arbor, Michigan. (P. 125).

Notwithstanding these visits, Ingleby testified that Dawson lacked the necessary two to three months to conduct due diligence but believed that Dawson had some protection under the stock purchase agreement.

66

(S.A. 184). Connolly similarly stated that Dawson did not conduct any due diligence of Faxon.

67

According to Connolly, Dawson needed to conclude an agreement within a short time period to alleviate the considerable unrest and concern within the library community. Consequently, Connolly testified that Dawson lacked the necessary time to conduct a thorough review of Faxon’s financial statements, internal controls, staffing, organization, customers and premises. (A. 155 & 162; P. 16, pp. 152-154, vol. III).

On September 29,1994, the board of Dawson PLC met and discussed the acquisition of Faxon for $15 million with $12 million subject to deferred payments over various time periods.

68

The minutes further reflect that Nat-West had agreed to provide acquisition funding and that, optimistically, Dawson would obtain $25 million of seasonal funding. The Dawson PLC board also heard reports from Connolly and Ingleby and thereafter approved Dawson, Inc.’s prospective acquisition of Faxon for $15 million. Also on September 29, 1994, the board of Dawson, Inc. issued a resolution to purchase Faxon for $15 million and provided Connolly with the authority to execute a written agreement.

69

(P. 139 & 140).

Concentrated efforts to negotiate the wording and to conclude a final agreement began in earnest in late September 1994. There were a series of drafts of the stock purchase circulated prior to the October 4, 1994 signing of the final agreement. (A.160). On September 28, 1994, Katten Muchin transmitted an initial draft of the agreement to Attorney John L. Bronson of Jager, Smith, Stetler & Arata (“JSSA,” “sellers’ counsel,” “plaintiffs’ counsel” or “Bronson”) requesting his comments. As explained in greater detail

infra,

the initial draft did not include the adjustments contained in subsection 1.5(a) through 1.5(g) of the final agreement. The benchmark net worth figure was also blank.

Further, the last sentence of section 2.1, which is the first section under the representations and warranties section of the agreement (section 2), defined the term “Company” as including each subsidiary of Faxon. (P. 138). In other words, Dawson initially proposed including all of the subsidiaries in the representations and warranties section of the agreement.

On September 30,1994, Bronson sent Kat-ten Muchin his comments and a marked-up

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draft of the agreement. (P. 146). Therein, sellers’ counsel proposed in a comment “that the representations and warranties should exclude the subsidiaries entirely” except for a representation as to Faxon’s ownership of the subsidiaries. The last sentence of section 2.1 is crossed out with a reference to the above comment. (P. 146). A subsequently drafted version contains the original last sentence of section 2.1 with handwriting excluding sections 2.3, 2.4 and 2.5 from the definition of the term “Company” which included the subsidiaries.

70

(P. 151). The final agreement includes the subsidiaries in the representations and warranties section except for sections 2.3 (Capitalization), 2.4 (Financial Statements) and 2.5 (Books and Records).

71

(P. 1).

With respect to section 2.4, the initial draft included the representation and warranty that, “Such financial statements and notes fairly present the financial condition (or, in the ease of the Pro Forma Balance Sheet, ejected financial condition) and results of operations of the Company ... all in accordance with GAAP.” (P. 138). The reply draft of sellers’ counsel excluded the pro forma balance sheet from this sentence and proposed that the sentence read as follows: “Such .financial statements and notes (other than the Pro Forma Balance Sheet)

72

fairly present the financial condition and results of the Company ... all in accordance with GAAP.” (P. 146). In the final agreement, this sentence does not contain the parenthetical and reads simply that, “Such financial statements and notes fairly present the financial condition and results of operations of the Company ..., all in accordance with GAAP.”

73

The purchase price adjustment mechanism in sections 1.5 and 1.6 was also the subject of various revisions prior to the final agreement. The final section 1.5 contains a $4,118,000 benchmark net worth figure. The purchase price adjustment set forth in the final agreement provides that if the “Adjusted Closing Net Worth” of Faxon, as audited and determined by Deloitte as of October 2, 1994, was below $3,618,000, then the agreement allowed Dawson to take a downward adjustment of the purchase

price for each

dollar the adjusted closing net worth was below the benchmark $4,118,000 amount.

According to Connolly, the parties derived the $4,118,000 figure from the $5,118,000 fig

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ure in the interim balance sheet attached to the letter of intent wherein the stockholder net equity figure for the domestic company is $5,118,000 as of July 29, 1994.

74

Connolly explained that the $1,000,000 difference derived from the sellers advising Dawson that the sales proceeds from the European subsidiaries was $1,000,000 less than anticipated.

75

(P. 16, pp. 194-195, vol.HI).

With respect to the entirety of sections 1.5 and 1.6, sellers’ counsel pointed out, in the reply draft, that the basis for the adjustments needed to be changed due to the EB-SCO withdrawal and the sale of Turner and Faxon Canada. The comment reads as follows:

The basis for the adjustments of the purchase price needs to be changed due to intervening developments since August (e.g. no EBSCO sale; Turner and Canada sales); the projected 9/30/94 balance sheet attached to the 8/31/94 letter agreement is no longer valid. Our suggestion is that if the operating loss for September should exceed a projected amount (on the order of $2 million) by more than $500,000, then an adjustment should be made.

(P. 146). Altman testified that the purchase price adjustment was not included to compare a consolidated net worth to a domestic net worth.

76

(P. 28, vol.III, pp. 36-37).

As it appears in the final agreement, section 1.5 contains a list of adjustments, (a) through (g). The first handwritten version of these adjustments appears in an undated version of a draft circulated after the September 30,1994 revision draft by Dawson (P. 146). (P. 151). As previously noted, “INSERT I” in Ferber’s handwriting appears on page three of this draft (P. 20, vol.II, p. 291) and refers to a handwritten paragraph later in the draft which reads as follows:

INSERT I

For purposes hereof, “Adjusted Closing Net Worth” shall mean the net worth (assets minus liabilities) of the Company, on a consolidated basis with its subsidiaries, as shown on the Closing Balance Sheet (defined in Section 1.6) adjusted so as not to

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give effect to the following:

77

(a) Operating losses of the Company and its Subsidiaries on a consolidated basis for August and September 1994; (b) the closing of Subsidiaries located in the Asia/Pacific region and Australia; (c) any increase in the bad debt reserve over $1,341,426;

78

(d) any write-off of capitalized software development costs or write-down of related computer hardware; (e) gain on the sale of Turner Subscription Agency, Inc. and Fax-on Canada, Inc., and any taxes thereon; and (f) any other adjustments required so that the Closing Balance Sheet shall have been prepared on a consistent basis with the Interim Balance Sheet (defined in Sec- . tion 2.4).

(P. 151)

Ferber remembers that Connolly,

79

Bronson, Attorney Mark Wood and himself discussed the list of purchase price adjustments on October 4,1994, prior to the signing of the agreement that day. Ferber’s understanding of subsection 1.5(g) was that it was designed to make sure that accounting policies did not change.

80

(P. 20, pp. 69-72 & 82-84, vol. I).

Connolly testified that he proposed the language in subsection 1.5(g) and that he discussed the subsection with the sellers. Like Ferber, Connolly recalls that the purpose of subpart (g) was to remedy inconsistencies in accounting practices between those of Dawson and those of Faxon.

81

In contrast, Zuroff viewed subpart (g) as a recognition that “a closing balance sheet, a GAAP closing balance sheet by definition would have to be adjusted to reflect the basis that was used to put together the interim balance sheet.”

82

(P. 16, pp. 200-201, vol. Ill; P. 16, pp. 214r-219, vol. II; P. 21, p. 170, vol. VI).

Dawson’s initial draft of the agreement proposed the use of Coopers & Lybrand, Dawson’s auditors at the time, to conduct the audit in section 1.5, later renumbered as section 1.6. At Faxon’s suggestion, the parties substituted Deloitte as the auditors in section 1.6 of the agreement. Zuroff pointed out to Dawson that Deloitte would conduct an audit in a shorter period of time because of its familiarity with Faxon. Dawson agreed and Deloitte became the designated auditors in section 1.6 of the final agreement. (P. 138; A. 90-91; P. 21, pp. 19-20, vol. VII; P. 16, pp. 206-208, vol. III).

The parties also focus their dispute on sections 2.8 and 8.2 of the agreement, the accounts receivable warranty and set off provisions.

83

The final agreement defines the term “Accounts Receivable” as “all accounts

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receivable (individually on a gross basis) of the Company.” Section 2.1 provides that the term “Company” as used in section 2, except for sections 2.3, 2.4 and 2.5, is to include each of Faxon’s subsidiaries. The accounts receivable sections (§§ 2.8 and 8.2) therefore encompassed the receivables due to Nihon Faxon from Nihon Faxon’s customers.

84

The language in the penultimate sentence of section 8.2 also establishes that the aggregate outstanding balance due under two demand notes owing to Faxon from Charles E. and Helen R. Rowe (“the Rowe notes”) was an account receivable within the meaning of sections 2.8 and 8.2.

85

Under section 2.8, the sellers agreed to deliver to Dawson “at the Closing a complete and accurate schedule” of the accounts receivable as of October 2, 1994. The aggregate amount of the accounts receivable would then be reflected on the Closing Balance Sheet which, under section 1.6, was going to be prepared by Deloitte within 60 days after the closing.

86

Under section 8.2, Dawson could reduce its installment payments under the notes if Faxon collected less than the aggregate accounts receivable. Specifically, if at the end of 335 days after the closing and thereafter annually, Faxon collected on the accounts receivable an amount less than the aggregate amount of the accounts receivable (minus a bad debt reserve of $1,341,426 for uncollectible accounts), then Dawson could reduce its annual installment payments under the notes by the amount of the uncollected receivables.

With respect to section 2.8’s requirement that the sellers deliver to Dawson the “Accounts Receivable Schedule” at the closing,

87

Zuroff testified that he made it clear to everyone that he could deliver a printed schedule. He further stated that all parties knew that delivering a schedule was impractical due to “its immense size.” According to Zuroff, “all parties were aware that the information was available to them electronically.” Moreover, all parties agreed it would be impractical for the sellers to bring a printed copy of the accounts receivable schedule to the offices of JSSA, according to Zuroff.

With respect to the delivery and content of the accounts receivable, Zuroff stated that Faxon’s computing system could provide different slices of information. According to Zuroff, in lieu of delivering an unwieldy printed schedule, what was available at the closing was access to the information on Fax-on’s mainframe computer. Referring, to the accounts receivable schedule, Zuroff further testified that the information was available at the closing electronically. In fact, according to Zuroff, the parties could technically access the information at the closing by telephone.

In addition, Zuroff testified that Faxon made an electronic copy on a computer tape of the receivables database as of October 2, 1994, and made the tape available to Connolly around the time of the closing. According to Zuroff, the accounts receivable database

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contained “detailed information.” He also testified that the tape was made available to Deloitte and that Deloitte had direct access to Faxon’s computer database.

88

(P. 21, pp. 84-88, vol. VII; P. 21, pp. 88-92, vol. I).

The existence of the tape discussed by Zuroff is buttressed by an inventory log for September 29, 1995, for Safesite, a national business records management company used by Faxon. The log describes as Faxon inventory certain CODA backup tapes for October 6,1994.

89

Plaintiffs’s expert avers that “we” had access to the “Safesite tape” and reviewed a number of accounts therein.

Zuroff acknowledged, however, that the sellers did not bring a hard copy of the schedule to the offices of JSSA on the day of the closing.

90

Rather, the sellers gave Dawson access to the schedule and Zuroff advised Connolly that there was such access through Faxon’s computer system, according to Zu-roff. (P. 21, pp. 84-88, Vol. VII; P. 21, pp. 88-92, Vol. I; Docket Entry # 289, ¶, 10).

Similarly, Mark J. Gisherman (“Gisher-man”), Treasury Manager at Faxon at the time of the closing, stated that he asked a Faxon employee to make sure that there was a hard copy of the accounts receivable as of the date of the acquisition which he believed was September 30, 1994. He also believed that the hard copy was kept in a filing cabinet outside his office. (P. 22, pp. 43-47, Vol.I).

In contrast to the testimony of Zuroff and Gisherman, Connolly stated that the parties did not agree that the schedule did not have to be produced because of its volume. According to Connolly, he requested the schedule at the closing and Zuroff could not give him a schedule at the closing. Connolly also had no understanding that Zuroff had “downloaded a copy of the accounts receivable database” and “made a copy of the tape.”

91

(A. 146; A. 147).

With respect to the content and completeness of the receivables database, plaintiffs did not produce a list of accounts receivable for Nihon Faxon prior to the October 14, 1994 closing. (A.79). Plaintiffs also acknowledge that, “Although all of Faxon’s $64,808,224

92

accounts receivable were contained on the CODA tape, some of Nihon Faxon’s $1.2 million in accounts receivable were not included.”

93

(Docket Entry # 317,, n. 23).

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In addition to plaintiffs’ concession, Davis testified that portions of Nihon Faxon’s export business were not reflected on the CODA system. Significantly, however, she was not sure how Nihon Faxon’s import business was reflected. In reference to hard copies or computer data at Faxon listing Nihon Faxon’s receivables, she further stated that “there probably was.” (A.192). Finally, Riley avers that the bulk of Nihon Faxon’s accounts receivable information was not contained in the CODA system.

94

(A.677). Accordingly, whether the sellers made a delivery of a complete and accurate schedule at the closing as required under the first sentence of section 2.8 is disputed. It is therefore unnecessary to decide whether the integration clause (section 11.5) prevented the parties from mutually agreeing, not to enforce the requirement that the sellers deliver a schedule at the closing.

In addition to the delivery of a complete and accurate schedule, the parties also dispute the meaning of the term “Accounts Receivable” and, specifically, the manner to calculate the accounts receivable. Dawson contends that, in light of the language “individually on a gross basis,” the accounts receivable calculation begins with a gross number, i.e., the gross debits owed by customers to Faxon. Plaintiffs assert that, given the entire text of the sections, accounts receivable begins with a net number, i.e., the net debit amount in customers’ accounts.

The parenthetical words “individually on a gross basis” in section 2.8 were added to the agreement relatively late in the negotiation process. (A.89). Neither Davis (A.189) nor Zuroff could remember who suggested the language.

95

Zuroff generally recalled, however, that the words were inserted to clarify that the sellers were providing Dawson with “information about both the debits and the credits.” Zuroff also understood that uncollected receivables was a net number which included debits and credits. Viewed in a light favorable to plaintiffs, therefore, Zu-roffs testimony (P. 21, pp. 88-93, vol. VII; P. 21, p. 181, vol. 1) establishes that there is

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some parol evidence

96

in the record showing that the parties intended accounts receivable to include both debits and credits as opposed to simply gross debits.

97

There is, however, parol evidence to the contrary. In particular, Connolly testified and his notes reflect that he understood that an account receivable was an amount owed by a customer individually on a gross basis excluding certain credits such as prepayments. Connolly understood that Dawson would determine the gross debit balances existing on September 30, 1994,

98

and then compare this figure with the gross debit balances existing one year later in 1995 and then be able to make a claim for the outstanding difference, minus the bad debt reserve. In other words, according to Connolly, the sellers guaranteed the collection of gross debit balances as opposed to net receivables. Connolly also noted that Dawson was concerned about Faxon’s accounts receivable and that he discussed the issue at length, primarily with Zuroff. According to Connolly, he further understood that the words “individually on a gross basis” gave Dawson the protection it sought. (A. 145; A. 146; A. 147; A. 370-372; A. 166; A. 167).

The construction of the term “Accounts Receivable” requires consideration of language in the final sentence of section 2.8. Dawson proposed the initial draft of this sentence which also appears in the final agreement.

99

(P. 138). Dawson therefore drafted the final sentence in section 2.8.

According to Zuroff, Faxon’s practice during his tenure was to examine a particular credit entry in an account receivable and to ascertain what caused the credit and whether it was proper to apply the credit to a particular receivable. Zuroff described the process of matching a particular credit to a debit as cumbersome and complicated.

100

Similarly, Riley, who occupied the position at Faxon of Chief Financial Officer after the acquisition, averred that it took his staff a substantial number of hours to identify and to apply properly a particular debit to the corresponding credit within an account. (A. 681; P. 38; P. 21, pp. 93-95, vol. VII).

The closing balance sheet prepared by De-loitte shows an entry of $63,466,818 as the accounts receivable minus a $1,343,000 allowance for doubtful accounts. Zuroff testified that this number represented all customers with a net debit balance. (P. 21, p. 114, vol.I). Examining the Deloitte closing balance sheet, Riley similarly testified that the $63,466,818 number under accounts receivable represented the total of customer accounts wherein the customers had debits greater than the amount of credits. (P. 19, p. 99, vol.III). Riley averred that customers in this net debit position are reported under the accounts receivable category. (A.682-683). Riley additionally explained that customer accounts with net credits, i.e., credits in their account in an amount greater than debits in their account, were reflected under the liabilities section of the balance sheet under the subheading “customers’ credit balances.”

101

The closing balance sheet shows

*95

the amount of customer credit balances as $10,281,740. (P. 19, pp. 98-102 & 105-107, vol. Ill; P. 179; A. 682).

After the closing, Riley testified that the account statements Faxon sent to customers showed a total balance net of all credits and debits.

102

Ordinarily, absent a request from the customer, Faxon only sent out account statements to customers having a net debit balance in their account. Faxon did not generally send account statements to customers with accounts in a net credit balance. Typically, when Faxon received a payment from a customer, it posted the payment to the customer’s account and determined whether it could apply the credit to a particular invoice or debit. (P. 19, pp. 60 & 69, vol. Ill; S.A. 84-85).

After the closing, Connolly testified that Faxon continued to make efforts to collect the outstanding receivables due to the company as of the day of the closing. (A.167). Faxon generally credited payments to the particular account as the payment came into the company. Indeed, by the end of the third year after the closing, Faxon’s collection efforts had reduced the accounts receivable as of the day of the closing to a number which was below the bad debt reserve, even according to Dawson’s calculations. (A. 681; A. 676).

Zuroff testified that at one point during a break in the negotiations on October 4, 1994, Connolly told him that he had “no incentive to collect receivables because there [was] an offset to the purchase price.”

103

(P. 21, p. 81, vol.I). A November 20, 1995 report generated by Chemical Connecticut Corporation in connection with Faxon’s request for additional funding also describes Faxon’s collection efforts for pre-acquisition receivables as “tempered due to the guarantee” and the lack of reimbursement for Faxon’s collection costs. In addition, Connolly testified that the amount of accounts receivable funds collected during the initial collection period was “of no interest to [him].” He further explained, however, that it was not his job to get involved in the level of detail with regard to the amount of credits applied during the initial collection period. (P. 237; P. 16, pp. 213-214, vol. IV).

On October 4, 1994, the parties executed the final agreement. The language in the agreement speaks for itself and is produced in more detail in the context of discussing a particular provision. The Dawson PLC board formally ratified the acquisition and approved a $25,000,000 line of credit from Chemical Bank on October 13, 1994. The closing took place on October 14, 1994, at which time Dawson, Inc. took title to the Faxon stock and presumably made the initial $3 million payment due at the closing. Dawson, Inc. also signed the promissory notes promising to pay plaintiffs the $11 million purchase price in seven annual installments subject to the adjustments in sections 1.2, 1.5, 1.6 and 8.2 of the agreement. (P. 1-3 & 158).

In light of section 1.6’s requirement for Dawson to prepare and cause Deloitte to audit a closing balance sheet of Faxon within 60 days following the closing, Dawson set about contacting Deloitte. (P. 155). As explained below, however, Deloitte refused to make a determination of the adjusted closing net worth of Faxon in the fall of 1994.

At an undetermined time in October 1994, albeit after the October 2,1994 signing of the agreement, Edward F. Paquette (“Pa-quette”), an audit partner at Deloitte, testified that he spoke with Connolly about performing an audit of Faxon’s closing balance sheet (“the first audit”). According to Pa-quette, Deloitte told Connolly that auditors generally audit financial statements and that Deloitte’s role in these kinds of assignments was not to determine the purchase price or

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adjustments thereto. Paquette could not recall whether Connolly specifically asked him to determine the adjusted closing net worth of Faxon. (P. 25, pp. 6 & 146-151, vol. I).

At the time Dawson signed the October 4, 1994 agreement, Connolly fully expected that Deloitte would be willing to determine the adjusted closing net worth of Faxon. (P. 16, p. 208, vol.III). Connolly had prior experience in using the mechanism in a purchase and sale agreement whereby an accounting firm would determine the purchase price and adjustments thereto. The British, French and Italian accounting firms used by Connolly in the past to make such determinations never raised any issues concerning such determinations. In addition, the sellers did not indicate any doubt to Connolly before the October 4, 1994 signing of the agreement as to Deloitte’s unwillingness to make such a determination.

104

Connolly, however, did not discuss the issue of Deloitte determining the purchase price adjustment with Deloitte pri- or to the October 4, 1994 signing of the agreement.

105

(P. 16, pp. 208-209, vol. Ill; P. 16, pp. 171-172, vol. IV).

As pointed out by Dawson (Docket Entry # 295, p. 11), plaintiffs admit that Deloitte did not express any unwillingness to make the determination of the adjusted closing net worth prior to the October 4, 1994 signing of the agreement.

106

(A.83). There is, however, circumstantial evidence to the contrary. As Dawson also points out: (1) Zuroff testified that he discussed Deloitte’s unwillingness to perform the determination with Pa-quette or Gerry Kelly (“Kelly”) of Deloitte but Zuroff could not remember whether the discussions took place before or after the closing; (2) Zuroff also stated that he casually discussed the issue with Davis after the closing and that he may have discussed it with her prior to the closing; (3) Zuroff further testified that the discussion[s] with Davis “[pjrobably” would have been at Faxon headquarters in Westwood; and (4) Zuroff did not remember Davis being at Faxon headquarters after the closing. Although at times in his testimony Zuroff could not remember when the discussions took place, he also testified at one point that the discussions “more likely” occurred prior to the October 14, 1994 closing and the October 4, 1994 signing and, indeed, during the iteration of the agreement. (A.225-227).

After the October 4, 1994 signing of the agreement, Connolly received the first draft of Deloitte’s engagement letter to perform the audit work. At that time, Connolly first learned about Deloitte’s unwillingness to perform the determination.

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(P. 16, pp. 272-277, vol.I). The final engagement letter dated November 1, 1994 (“the first engagement letter”), as well as a prior draft contain the following limitation:

The purpose of our engagement to audit the balance sheets of Faxon and Turner, as of October 2,1994 and September 30,1994, respectively, is to evaluate the fairness of presentation of such balance sheets in conformity with generally accepted accounting principles, in all material respects, and not for the purpose of determining the purchase price, or adjustments to the purchase price, of Turner or Faxon.

(P. 163; P. 164). The first engagement letter therefore confines the scope of Deloitte’s work to performing an audit and disavows performing a determination of adjustments to the purchase price.

Connolly had several discussions with De-loitte about its unwillingness to make the determination. According to Connolly, however, Deloitte remained firmly opposed to

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performing a determination of the purchase price adjustment.

108

Connolly did not inform the sellers about Deloitte’s refusal and/or the terms of the November 1, 1995 engagement letter prior to sending them the calculations in December 1994. It is undisputed that Deloitte performed the first audit but that it did not perform the determination. (P. 16, pp. 272-277, vol. I; P. 16, p. 210, vol. III).

The 60 day time limit for Deloitte to audit Faxon in subsection 1.6(a) of the agreement expired on December 13,1994. Deloitte produced an audit report dated December 13, 1995.

109

On December 23,1994, Dawson sent plaintiffs a letter and included therein the first audit prepared by Deloitte. Dawson also claimed a purchase price adjustment under sections 1.5 and 1.6 in an amount of $3,961,-723. The letter contains a schedule of the adjusted closing net worth of Faxon. The letter referred to the determination of the adjusted closing net worth pursuant to section 1.6 but did not advise plaintiffs that

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Connolly had made the determination. The schedule with the determination of Faxon’s adjusted closing net worth is neither on Dawson stationary nor on Deloitte stationary. It is undisputed that Connolly, using the net worth in the closing balance sheet as audited by Deloitte, performed the adjustments set forth in subsections 1.5(a) through 1.5(g) and determined the adjusted closing net worth of Faxon. (P. 16, pp. 211-212, vol.III).

By letter dated January 5, 1995, plaintiffs made a timely

110

objection to Dawson’s claimed purchase price adjustment under sections 1.5 and 1.6. Plaintiffs objected to the set off because it failed to make a proper adjustment under subsection 1.5(g) given the difference in comparing the consolidated closing balance sheet and the unconsolidated interim balance sheet. The letter also complained about insufficient information to allow plaintiffs to determine the basis for Dawson’s adjustment and requested, pursuant to section 11.3,

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an opportunity to review De-loitte’s work papers. (A.555-556).

In reply, by letter dated January 10, 1995, Dawson advised plaintiffs that the “consistent basis” in subsection 1.5(g) referred to consistent accounting policies. (P. 182). Dawson’s letter also noted that Dawson agreed with the suggestion of plaintiffs’ counsel to discuss the proposed section 1.5 and 1.6 purchase price reductions before submitting the issues to “the ‘Accountants.’ ”

112

It is undisputed that the parties met in early February 1995 in an attempt to resolve their differences. (Docket Entry # 356, p. 44; Docket Entry # 317, p. 64). During this meeting, whose participants included Zuroff, Connolly and Altman, there is evidence that Connolly made a statement which, in substance, indicated that Dawson had no intention to try and collect the outstanding accounts receivable. Dawson submits that Rule 408, F.R.E., prohibits the admissibility of the statement.

According to Connolly, the February meeting amongst the parties was “part of negotiation of a settlement, of the ultimate settlement of the transaction.” A letter from Dawson’s counsel to sellers’ counsel suggested that the parties meet to resolve their dispute. (A.185). In the context of these negotiations, Connolly remembers making a statement to Altman in the nature of that he had no incentive to collect the accounts receivable. (P. 16, p. 244, vol.II). Altman and Zuroff recall similar statements.

113

(P. 28, pp. 197-198, vol. I; P. 21, pp. 132-133, vol. I; P. 21, pp. 33-34, vol. II). In light of the purpose and the context in which Connolly made the statement during the February 1995 meeting,

see Kleen Laundry and Dry Cleaning Services Inc. v. Total Waste Management Corporation,

817 F.Supp. 225, 228-229 (D.N.H.1993) (rejecting the plaintiffs’ argument that statements preceded formal complaint);

see also Derderian v. Polaroid Corporation,

121 F.R.D. 9, 11 (D.Mass.1983) (noting that Rule 408 applies to statements made during compromise negotiations as well as the offer or completed compromise itself);

see generally McInnis v. A.M.F., Inc.,

765 F.2d 240, 247-248 (1st Cir.1985) (discussing Rule 408), the evidence is inadmissible for summary judgment purposes.

114

As result of the February 2, 1995 meeting, the parties allegedly agreed to forestall resolving the dispute via the accountants under

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section 1.6 and to allow the sellers an opportunity to view Deloitte’s work papers with respect to the first audit. A meeting took place in late February or early March 1995 during which Joseph Caplice (“Caplice”), an accountant advising the sellers, had access to a portion of Deloitte’s work papers. Negotiations at the meeting deteriorated and Pa-quette halted the meeting. (P. 25, pp. 88-91, vol. I; P. 188).

On March 1, 1995, Dawson’s counsel notified sellers’ counsel that it would no longer agree to the postponement of the procedures set forth in section 1.6. (P. 189). On March 23, 1994, Dawson’s counsel specifically advised the sellers that, if they did not accept the closing balance sheet, as audited by De-loitte, then the next step was to submit the dispute to the accountants as provided for in section 1.6. (P. 193). Sellers’ counsel replied to the March 23, 1995 letter by letter dated March 30, 1995. Therein, the sellers raised a further objection to Dawson’s purchase price adjustment under sections 1.5 and 1.6, to wit, that Deloitte did not perform the determination of the adjusted closing net worth as required under subsection 1.6(b).

115

(P. 194).

By letter dated April 10, 1995, Dawson’s counsel acknowledged to sellers’ counsel that the adjusted closing net worth was not determined by Deloitte. Dawson’s counsel also maintained that Deloitte’s corporate policy precluded undertaking the determination thereby rendering performance of the condition in subsection 1.6(b) an impossibility. The letter also suggested that Deloitte, if indemnified by Dawson and the sellers,. might be willing to examine the correctness of Dawson’s adjustment figures. Noting that Dawson would accept these conditions, the letter concluded that, unless the sellers are willing to accept these approaches, then Dawson would proceed in accordance with the agreement, i.e., to arbitration by the accountants.

116

(P. 201).

According to Connolly, because the sellers raised an issue about his determination of the closing net worth, he reopened discussions with Deloitte. Paquette discussed with both Connolly and Ferber the maximum amount of work that Deloitte could perform. Pa-quette understood that the central purpose of the second audit was to accommodate Dawson with respect to the purchase price adjustment. Paquette also testified that he discussed the difficulty in reconciling the net worth figures in the interim balance sheet and the consolidated closing balance sheet with Connolly.

117

(P. 25, pp. 163-167, Vol.I).

In June 1995 Dawson and Deloitte issued a second engagement letter (“the second engagement letter”) for Deloitte to perform another audit of Faxon as of October 2, 1994 (“the second audit”). (P. 214). According to Paquette, the second audit and/or the second engagement letter was the maximum effort that Deloitte “could possibly do.” (P. 25, pp. 144-145 & 152-153, vol. I).

Ultimately, once Dawson agreed to indemnify Deloitte from any legal action arising from performing more extensive work, De-loitte performed the second audit which included a footnote,

118

prepared by Dawson

119

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together and in consultation with Deloitte, which contained the closing net worth adjustments and determination. Unlike the first audit, the second audit included an audit of the consolidated financial statements of Fax-on for the period from August 1, 1994 to October 2,1994.

120

(P. 214; P. 176; P. 163; P. 16, pp. 212-215, vol. Ill; S.A. 45-47; P. 25, pp. 151-152, vol. I; P. 25, pp. 186-187, vol. I; S.A. 34b-34c; A. 216; P. 218).

Paquette testified that Deloitte does not opine on individual items within a financial statement nor opine on items within a footnote. Rather, the company gives an overall opinion on the reasonableness or fairness of the financial statements. It is nevertheless true that the company makes inquiries about information within the financial statements and the footnotes thereto. Furthermore, because the footnotes are part of the financial statements, Deloitte’s work also includes reviewing the footnotes.

121

As previously explained, the second audit was the maximum effort Deloitte was willing to perform. (P. 25, pp. 136-138, vol. II; P. 25, pp. 189-190, vol. I).

Deloitte issued the second audit dated August 10, 1995. The second audit report states that, Deloitte has audited the accompanying consolidated balance sheets and financial statements of Faxon. The second audit report further states that in Deloitte’s opinion, such financial statements “present fairly, in all material respects, the financial position of’ Faxon in accordance with GAAP.

The attached consolidated financial statements characterize the footnotes as “an integral part.” Footnote two makes a calculation of Faxon’s adjusted closing net worth as of October 2, 1994, in the negative amount of $284,235. The footnote also states that there were no adjustments under subsection 1.5(g). (P. 218; A. 583-590). With respect to the lack of an adjustment under subsection 1.5(g), Paquette testified that Deloitte examined the consistency in the application of accounting principles in the consolidated closing balance sheet and the domestic interim balance sheet. (P. 25, pp. 195-197, vol.I).

By letter dated October 4, 1995, Dawson “readjusted” its purchase price adjustment claim under sections 1.5 and 1.6 in light of the second audit. In writing to sellers’ counsel, Dawson’s counsel claimed a purchase

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adjustment of $4,402,235

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based on the adjusted closing net worth in footnote two of negative $284,235. (P. 233).

After the closing and in addition to the aforementioned purchase price adjustment claim under section 1.5 and 1.6, Dawson took several deductions from the purchase price installment payments based on uncollected balances in accounts receivable. By letter dated September 22, 1995, Dawson gave notice to plaintiffs that it would take, as of September 14, 1995, a purchase price adjustment for uncollected receivables in an amount of $4,533,283, net of the bad debt reserve.

123

(P. 229). Dawson calculated the accounts receivable adjustment by taking the aggregate amount of the gross debits in customer accounts which existed as of October 2, 1994, minus the amount in cancellations of pre-October 1994 orders after the agreement (“credit book onlys”). This amount of gross debits as of October 2, 1994, minus credit book onlys was $79,349,639 for Faxon. The total amount of accounts receivable was $1,293,060 for Nihon Faxon.

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The total amount of gross debits of Faxon and accounts receivable of Nihon Faxon as of October 2, 1994, together with the amount outstanding under the Rowe notes as of October 2, 1994, came to $80,821,599. (A. 602; A. 674-676).

By the end of the first collection period (September 14,1995), Faxon had reduced the $79,349,639 gross debits of Faxon to $5,004,-621 and the accounts receivable of Nihon Faxon to $678,035. (A.675-677). The balance on the Rowe notes as of September 14, 1995, was allegedly $192,053. Taken together, these amounts ($5,004,621, $678,035 and $192,053) total $5,874,709 which, minus the bad debt reserve, resulted in a claimed accounts receivable adjustment of $4,533,283.

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In the September 22, 1995 letter informing the sellers of the claimed accounts receivable adjustment, Dawson also noted, in the alternative, that if the sellers’ theory under section 1.5 proved correct then Dawson would take a further adjustment for Nihon Faxon’s uncollected receivable.

126

(P. 229).

By letter dated September 24, 1996, Dawson took a second adjustment for uncollected receivables as of September 12, 1996, effective October 14, 1996, in an amount of $317,-204, net of the bad debt reserve.

127

(P. 243). In light of Faxon’s continued efforts to collect receivables, Dawson advised plaintiffs it would restore the difference between the two uncollected receivables, $4,216,079, to the ag

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gregate outstanding balance under the notes.

128

(P. 243; A. 167-168).

By letter dated September 22, 1997, Dawson advised plaintiffs that it would not seek a third accounts receivable adjustment inasmuch as the uncollected receivables as of September 12,1997, had fallen below the bad debt reserve. Accordingly, Dawson advised plaintiffs it would restore the previous year’s $317,204 adjustment to the purchase price and the aggregate outstanding balance under the notes, effective October 14, 1997. Riley similarly avers that Dawson will restore $317,203 to the purchase price, effective October 14,1997. (Docket Entry # 356, Ex. H; A. 681).

In all of these accounts receivable adjustments, Dawson did not include the amount of Nihon Faxon’s intercompany debt in either the accounts receivable initial figure or the uncollected receivables figure. Dawson did, however, include the amounts owed to Nihon Faxon by Nihon Faxon customers. (Docket Entry # 356, Ex. H).

After the closing, Dawson also took several deductions from the purchase price installment payments due to alleged breaches of warranty. The first set off letter from Dawson’s counsel is dated April 10, 1995, the same day Dawson’s counsel issued the letter acknowledging that Deloitte did not perform the determination of the adjusted closing net worth under subsection 1.6(b) and suggesting that the sellers agree to allow Deloitte to assess the correctness of Dawson’s determination and, if not, Dawson would proceed in accordance with the agreement.

129

The April 10, 1995 letter claims a warranty set off in the aggregate amount of $6,641,404 due to: (1) plaintiffs’ nondisclosure of the internal financial statements prepared on September 9, 1994, showing actual losses to Faxon of $6,857,000, for the period from April to July 1994, as opposed to the $5,347,000 actual loss figure in the interim balance sheet;

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and (2) plaintiffs’ misrepresentation that the foreign subsidiaries did not materially impact the overall financial state of Faxon when, in fact, the foreign subsidiaries had a negative net worth of $5,131,400 as of September 30, 1994.

131

(P.200).

By letter dated April 25, 1995, sellers’ counsel expressly advised Dawson’s counsel that Dawson had received the July 31, 1994 consolidated financials prepared on September 9, 1994, prior to the closing. (P. 203). In reply, on May 9,1995, Dawson denied that it obtained the July 31, 1994 statements prepared on September 9, 1994, prior to the closing. (P. 205).

On October 11, 1996, Dawson revised, as opposed to restated, its breach of warranty claim initially made in the April 10, 1995 letter. The revised claim omits reference to the nondisclosure of the financials prepared on or about September 9, 1994, and relies on misrepresentations of Faxon’s net worth contained in the interim balance sheet including the projected pay down of the Nihon Faxon intercompany debt. The October 11, 1996 claim letter, signed by Connolly and addressed to plaintiffs, also raises issues surrounding the nondisclosure of the June 30, 1994 board minute, the nondisclosure of the cancellation of a customer account with Ni-hon Faxon and matters involving certain tax liabilities and the accounts receivable schedule. (P. 244; A. 608-621; P. 16, vol. Ill, p. 232).

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As a final matter, plaintiffs raise additional allegations concerning their fraud claim with respect to the Turner agreement and a severance agreement with a former Faxon employee. Dawson claims that the law of this case bars plaintiffs from reasserting allegations based on the Turner agreement. In November 1995 Dawson filed a motion to dismiss the original complaint including the Count III claim based on breach of the Turner agreement. By Endorsed Order of July 8, 1996, the district judge allowed Dawson’s motion to dismiss Count III with the following language:

After hearing, ALLOWED as to Count III [of the original complaint] without prejudice to arbitrating that provision. Plaintiffs’ counsel shall advise by 7/12/96 if Count III will be submitted to arbitration. Otherwise, the motion is DENIED.

(Docket Entry # 4). Plaintiffs’ fraud count in the amended complaint alleges that Dawson: (1) misrepresented that its purchase price reduction claim under Turner had been determined in accordance with the Turner agreement when, in fact, Deloitte’s engagement letter with Dawson expressly stated that Deloitte’s audit was not to be used for purposes of determining a purchase price adjustment of Turner; and (2) failed to disclose that it had changed Turner’s revenue recognition policy in the Turner closing bal-anee sheet from the policy used in the benchmark interim balance sheet (thereby resulting in a purchase price reduction claim due to Turner’s lowered net worth) and then concealed this fact by representing that the change in policy was due to a restructuring charge.

132

(Docket Entry # 241, ¶¶ 81 & 82).

In contrast to a fraud claim of misrepresentation and concealment, Count III of the original complaint was a breach of contract claim, albeit also grounded on the Turner agreement. Dawson moved to dismiss the claim because the Turner agreement only required Deloitte to audit a closing balance sheet within 60 days. (Docket Entrye4 & 5), Plaintiffs opposed dismissal of Count III because the audit report was dated November 25, 1994,

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after the November 19, 1994 60-day deadline. (Docket Entry # 14).

On July 8, 1996, the district judge heard oral argument on the motion to dismiss. With respect to the Turner issue of timeliness under Count III, the district judge noted that, where the parties are only ten days or a week late without any showing of prejudice, Massachusetts law, specifically, the decision in

Quirk v. Schenk,

34 Mass.App.Ct. 931 , 612 N.E.2d 1194 (1993),

review denied,

415 Mass. 1106 , 616 N.E.2d 809 (1993), did not enforce time of the essence clauses when equitable relief was being sought.

134

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On July 12, 1996, plaintiffs filed a motion for reconsideration (Docket Entry # 66) which Dawson opposed (Docket Entry # 74). After plaintiffs filed a reply (Docket Entry #81) and Dawson filed a surreply (Docket Entry # 87), the district judge denied plaintiffs’ motion for reconsideration with the following endorsement: “DENIED as untimely. There is no record indication of newly discovered evidence.” The district judge therefore denied reconsideration on procedural grounds and did not reach the merits of the substantive arguments, including plaintiffs’ argument that the engagement letter for De-loitte to audit the Turner balance sheet stipulated that the audit could not be used for purposes of determining the purchase price adjustment under Turner.

The substance of plaintiffs’ fraud claim is based on Dawson’s change in the revenue recognition policy used to calculate the Turner adjusted closing net worth. Plaintiffs assert that Dawson changed the Turner interim balance sheet’s revenue recognition policy when calculating the Turner closing net worth as shown on the Turner closing balance sheet.

135

(Docket Entry # 241, ¶¶ 77-82).

By letter dated December 19, 1994, Dawson asserted a section 1.5/1.6 purchase price adjustment under the Turner agreement in the amount of $337,024. (P. 178). The attached Deloitte closing balance sheet for Turner as of September 30, 1994, identified the revenue recognition policy used by Deloitte. Therein, Deloitte states that it used a policy to defer the revenue received at the time of a subscription sale until the time when the subscription began. The notes to the closing balance sheet state that:

The Company recognizes the full amount of subscription sales (which includes a service fee) and the related cost of the subscriptions (net of publisher discounts) in the period in which subscriptions begin, which generally coincides with the period in which billings are made to customers. Such period also generally coincides with the period in which customer subscriptions are actually placed with publishers and the principal services are rendered.

Deferred revenue arises from billings in advance of the period in which subscriptions begin, and are actually placed with publishers.

(P. 178). Faxon’s consolidated financial statements for the periods ending March 1992, 1993 and 1994, under the heading revenue recognition policy, also consistently used this same revenue recognition policy.

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(S.A. 216, 232-233 & 248).

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After the sale of Turner and Faxon to Dawson, Faxon changed its revenue recognition policy on the closing balance sheet as of October 2, 1994, prepared by Deloitte in December 1994. The Faxon closing balance sheet recognizes revenue in the period in which billings are made to customers without the above described deferral of revenue. The attached notes explain that:

The Company records the full amount of subscription sales (which includes a service fee) in the period in which billings are made to customers. Consistent with the Company’s fiscal year end accounting policies, at October 2, 1994, no deferral of income or accrual of costs relating to the fulfillment of subscriptions, other than publisher payables are made for subscriptions which begins (sic) after the balance sheet date.

(P. 179).

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As a final matter, in addition to the fraud allegation based on the Turner agreement, plaintiffs make another fraud allegation, to wit, that Dawson misrepresented that Joel Baron (“Baron”), a former Faxon employee, terminated his employment with Faxon voluntarily and that Faxon incurred liability under the Key Employee Severance Plan (“the Plan”). (Docket Entry #241, 1HI84r-87). Section 9.2(f) of the agreement is part of the indemnity provision whereby the sellers agreed to indemnify Dawson “for any loss, liability, claim [or] damage ... in con-neetion with ... (f) any act, omission, circumstance or condition described on

Schedule 9.2.”

Schedule 9.2 sets forth certain “Indemnification Matters” including “Any liability of [Faxon] pursuant to its Key Employee Severance Plan (‘the Plan’) resulting from the voluntary termination by any participant in the Plan of his or her employment with [Faxon].” According to Altman, who remembers discussing the need for a plan, Faxon was concerned about losing key employees due to the instability at Faxon prior to the acquisition. (P. 28, p. 81, vol. II; A. 109). Baron, Vice President and Chief Publications Officer, was a named participant under the Plan. (S.A.63).

The Plan provided that if a participant such as Baron “terminates his or her own employment for any reason” after a merger, consolidation or sale of Faxon then the participant was “entitled to receive a lump sum payment in an amount equal to his or her then-current annual compensation.”

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(S.A.63). Baron claimed a right to severance pay under the Plan and was therefore paid severance of $115,000, equal to one year of his salary. (A.667).

As pointed out by plaintiffs to support their fraud claim, Dawson was interested in retaining Baron as early as the spring of 1994 to lead a publisher relations team. (P. 18, pp. 144-145 & 149, vol. I; P. 58). Prior to the sale of Faxon, Zuroff knew that Dawson was involved in discussions with Baron.

139

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(P. 21, pp. 54-55, vol.I). By facsimile transmission on December 9, 1994, Baron sent his December 8,1994 letter of resignation, effective December 23, 1994, to Ingleby and, on a separate page, noted that he was “responding to your request that I detail the issues that need to be addressed in our ongoing employment arrangement.” The facsimile describes Baron’s ongoing employment arrangement as involving 40% of his time.

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It" also describes his short term duties as, in part, “Corporate/executive role at Faxon relative to re-shaping Faxon policies and in redirecting acquisition to its core business.” (P. 173; A. 537).

After Baron resigned from Faxon, Zuroff testified that he continued to work at Faxon in the same office as a consultant. In fact, Zuroff believed that Baron was still consulting for Dawson and working in Faxon’s Westwood office as of August 12,1996. Connolly similarly avers that Baron accepted an offer to become a consultant to Dawson. Richard Lynch (“Lynch”) and Zuroff also resigned under the Plan but did not continue to work at Faxon. After leaving Faxon, Zuroff became Chief Financial Officer of Business Matters, Inc. whereas Lynch started his own consulting business in the field of rengineering. (A. 536; P. 21, pp. 13, 30-35 & 52-53, vol. I; A. 667).

On December 19, 1994, Connolly wrote to plaintiffs and asserted an indemnification claim under section 9.2(f) for $370,000, inclusive of Baron’s $115,000 severance payment. The letter makes the following representation which plaintiffs rely on in their fraud claim (Docket Entry # 241, ¶ 32):

Dawson hereby represents that Joel Baron, Richard Lynch and Mark Zuroff, each of whom are participants in the Plan, have each voluntarily terminated their employment with Faxon and, as a result, Faxon has incurred a liability of $370,000.00, representing the sum of $115,000 paid to Mr. Baron, $115,000 paid to Mr. Lynch and $140,000 paid to Mr. Zuroff.

(P. 178).

By letter dated February 24, 1995, however, sellers’ counsel informed Dawson’s counsel that the sellers would no longer oppose the $370,000 claimed setoff for severance pay. In particular, sellers’ counsel stated that:

[T]he Sellers have determined not to further oppose a set-off in the aggregate amount of $370,000 relating to severance payments to Messrs. Lynch, Baron and Zuroff, in reliance upon assurances from Dawson that The Faxon Company, Inc. (“Faxon”) has actually paid or incurred liability to pay such severances as described in Dawson’s letter dated December 19,1994 to the Sellers.

(A.557).

DISCUSSION

As expressly stated in section 11.10, the stock purchase agreement is governed by Massachusetts law. It is also without doubt that the stock purchase agreement is an integrated agreement representing the parties’ final expression. As expressed in section 11.5 of the agreement by the parties, “This Agreement supersedes all prior oral or written agreements between the parties with respect to its subject matter ... and constitutes as a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter.” Section 11.5 also contains the language that, the “Agreement may not be amended except by a written agreement executed by all of the parties hereto.” To the extent there is any doubt as to integration, the completeness, specificity and length of the agreement uniformly dictate that it is an integrated agreement.

See Coll v. PB Diagnostic Systems, Inc.,

50 F.3d 1115, 1123 (1st Cir.1995) (where parties reduce agreement to a writing “which in view of its completeness and specificity reasonably appears to be a complete agree

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ment, it is ... an integrated agreement unless” otherwise established as not a final expression);

Town & Country Fine Jewelry Group, Inc. v. Hirsch,

875 F.Supp. 872, 876 (D.Mass.1994) (factors to assess in determining if agreement is integrated include length, existence of integration clause and parties’ prior negotiations).

141

Language and wording become all the more important in an integrated agreement. “[T]he interpretation of an integrated agreement is directed to the meaning of the terms of the writing or writings in the light of the circumstances of the transaction.”

Boston Edison Company v. Federal Energy Regulatory Commission,

856 F.2d 361, 365 (internal quotation marks and citations omitted);

accord Robert Industries, Inc. v. Spence,

362 Mass. 751 , 291 N.E.2d 407, 409-410 (1973) (construing integrated agreement and noting, “[i]nterpretation is directed to the meaning of the terms of the writing in light of the circumstances, not to the meaning of the conversations of the parties” during negotiations);

Restatement (Second) of Contracts

§ 212(1) (1981) (same). Examining the words of an agreement in the context of the entire writing is a search for the “manifested meaning, not a privately held belief or intent of one party” left uncommunicated “to other parties to the bargain.”

Donoghue v. IBC USA (Publications), Inc.,

70 F.3d 206, 212 (1st Cir.1995);

accord ITT Corporation v. LTX Corporation,

926 F.2d 1258, 1263 (1st Cir.1991) (“ ‘[contracting parties are bound by objective manifestations and expressions, not subjective expectations’ ”);

see also Louis Stoico, Inc. v. Colonial Development Corporation,

369 Mass. 898 , 343 N.E.2d 872, 875 (1976) (“circumstances surrounding the making of an agreement must be examined to determine the objective intent of the parties”);

Edmonds v. United States,

642 F.2d 877, 881 (1st Cir.1981) (quoting

Stoico).

Furthermore, where, as here, the parties are sophisticated business entities

142

who, represented by attorneys, freely entered into a contract, it is not appropriate for a court to rewrite their agreement.

RCI Northeast Services Division v. Boston Edison Company,

822 F.2d 199, 205 (1st Cir.1987);

see also Louis Stoico, Inc. v. Colonial Development Corporation,

369 Mass. 898 , 343 N.E.2d 872, 875 (1976) (wording employed in agreement “is particularly significant in discerning [parties’] intent if it is unambiguous” and wording used becomes “even clearer” because amendment inserted with aid of “experienced attorney ... after discussion with .. parties”). “Rather, courts must give effect to the language of such agreements and to their discernible meaning.”

RCI Northeast Services Division v. Boston Edison Company,

822 F.2d at 205 .

Under the parol evidence rule in Massachusetts, “[e]vidence of prior or contemporaneous oral agreements cannot be admitted to vary or modify the terms of an unambiguous written contract.”

Fairfield 271-278 Clarendon Trust v. Dwek,

970 F.2d 990, 993 (1st Cir.1992);

Coll v. PB Diagnostic Systems,

50 F.3d 1115, 1122 (1st Cir.1995) (quoting Fairfield). Such unambiguous contracts are enforced according to their terms.

Den Norske Bank AS v. First National Bank of Boston,

75 F.3d 49, 52 (1st Cir.1996) (“should court find language unambiguous,” contract is interpreted “according to its plain terms”);

McDonald’s Corporation v. Lebow Realty Trust,

888 F.2d 912, 914 (1st Cir.1989) (unambiguous contract “must be enforced according to its terms”);

Edmonds v. United States,

642 F.2d 877, 881 (1st Cir.1981) (where wording is unambiguous, contract “enforced according to its terms”). Thus, where the agreement or the particular provision therein is unambiguous, “ ‘parties are bound by the plain terms of their contract’ and their subjective contemplations are immaterial.”

Coll v. PB Diagnostic Systems,

50 F.3d at 1122 .

Parol evidence cannot be used “to create an ambiguity where none otherwise exists.”

ITT Corporation v. LTX Corpora

*108

tion,

926 F.2d at 1261 . “A contract is not ambiguous simply because litigants disagree about its proper interpretation.”

Federal Deposit Insurance Corporation v. Singh,

977 F.2d 18, 22 (1st Cir.1992). An agreement is considered ambiguous only where its “terms 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.”

Rey v. Lafferty,

990 F.2d 1379, 1384 (1st Cir.),

cert. denied,

510 U.S. 828 , 114 S.Ct. 94 , 126 L.Ed.2d 61 (1993);

accord Coll v. PB Diagnostic Systems,

50 F.3d at 1122 (quoting

Rey).

Stated otherwise, an agreement is ambiguous when it is susceptible to “differing, but nonetheless plausible constructions.”

Federal Deposit Insurance Corporation v. Singh,

977 F.2d at 22 ;

see Boston Edison Company v. Federal Energy Regulatory Commission,

856 F.2d at 367 ;

Edmonds v. United States,

642 F.2d at 881 .

The parol evidence rule carries with it certain exceptions.

See Donoghue v. IBC USA (Publications), Inc.,

70 F.3d at 215 . “One exception to the general principle is that a court may consider parol and extrinsic evidence for the very purpose of deciding whether the documentary expression of the contract is ambiguous.”

Donoghue v. IBC USA (Publications), Inc.,

70 F.3d at 215 . Where the agreement is uncertain, the court may examine the circumstances leading to its execution to elucidate the terms and make clear their meaning and thereby determine if an ambiguity exists.

Robert Industries, Inc. v. Spence,

362 Mass. 751 , 291 N.E.2d 407, 409 (1973);

Boston Edison Company v. Federal Energy Regulatory Commission,

856 F.2d at 367 n. 3 (citing

Robert Industries, Inc. v. Spence,

291 N.E.2d at 409 and quoting

Sunstream Jet Express, Inc. v. International Air Service Company,

734 F.2d 1258, 1268 (7th Cir.1984));

Antonellis v. Northgate Construction Corporation,

362 Mass. 847 , 291 N.E.2d 626, 628 (1973);

New England Financial Resources, Inc. v. Coulouras,

30 Mass.App.Ct. 140 , 566 N.E.2d 1136, 1139 (1991). In addition, as pointed out by plaintiffs, “The parol evidence rule does not preclude consideration of background facts that explain the context in which the agreement was made.”

SAPC, Inc. v. Lotus Development Corporation,

921 F.2d 360 , 361 n. 2 (1st Cir.1990).

In the event the court determines that contract language is ambiguous then the court may consider extrinsic evidence to ascertain the parties’ intent.

Den Norske Bank AS v. First National Bank of Boston,

75 F.3d at 52 ;

see also RCI Northeast Services Division v. Boston Edison Company,

822 F.2d 199, 202 (1st Cir.1987) (where contract phrase is not unambiguous, “proper direction becomes one for the fact-finder who must ferret out the intent of the parties”). “In descending order of importance, extrinsic evidence may include: (1) the parties’ negotiations ...; (2) their course of performance; (3) their prior course of dealing; and (4) trade usage in the relevant ... industry.”

Den Norske Bank AS v. First National Bank of Boston,

75 F.3d at 52-53 (citations omitted). In addition, where uncertainty exists as to the intended meaning of the words employed, then the language may be construed against the drafter.

Federal Deposit Insurance Corporation v. Singh,

977 F.2d at 24 ;

Merrimack Valley National Bank v. Baird,

372 Mass. 721 , 363 N.E.2d 688, 690-691 (1977) (writing construed against “author of the doubtful language if the circumstances surrounding its use and the ordinary meaning of the words do not indicate the intended meaning of the language”);

RCI Northeast Services Division v. Boston Edison Company,

822 F.2d at 203 n. 3. It is also true that, “Separately negotiated or added terms are given greater weight than standardized terms or other terms not specifically negotiated.”

In re 604 Columbus Avenue Realty Trust,

968 F.2d 1332, 1358 (1st Cir.1992).

An agreement is examined and construed “ “with reference to all of its language and to its general structure and purpose and in light of the circumstances under which it was executed.’ ”

Cofman v. Acton Corporation,

958 F.2d 494, 498 (1st Cir.1992) (quoting

Radio Corporation of America v. Raytheon Manufacturing Company,

300 Mass. 113 , 14 N.E.2d 141 (1938));

accord In re 604 Columbus Avenue Realty Trust,

968 F.2d 1332, 1357 (1st Cir.1992) (court should

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consider each phrase and clause in light of all other phraseology). Both the structure and the specific words set out an agreement’s meaning.

Boston Edison Company v. Federal Energy Regulatory Commission,

856 F.2d 361, 366 (1st Cir.1988);

see, e.g., McDonald’s Corporation v. Lebow Realty Trust,

888 F.2d at 915 (noting that the fixed price option and right of first refusal appeared in “separate paragraphs with eight intervening paragraphs between them”).

143

Words within an agreement are “construed in their ordinary and usual sense,”

Boston Edison Company v. Federal Energy Regulatory Commission,

856 F.2d at 365 ;

Shane v. Winter Hill Federal Savings and Loan Association,

397 Mass. 479 , 492 N.E.2d 92, 95 (1986), “unless it appears that [the words] are to be given a peculiar or technical meaning.”

Woogmaster v. Liverpool & London & Globe Insurance Company,

312 Mass. 479 , 45 N.E.2d 394, 395 (1945);

see also Restatement (Second) of Contracts

§ 202(3) (1981). More specific contract terms ordinarily control over more general contract terms.

Lawson v. Federal Deposit Insurance Corporation,

3 F.3d 11, 17 (1st Cir.1993). Courts also examine the location of words within a sentence as well as the grammatical signals used, such as commas.

See Massachusetts Mutual Life Insurance Company v. Aritech Corporation,

882 F.Supp. 190, 194-195 (D.Mass.1995).

Sentences and the words therein, however, cannot be read in isolation. Rather, contract language is read in the context of the entire agreement in light of the circumstances.

Cofman v. Acton Corporation,

958 F.2d at 498 . Finally, a construction of an agreement which renders part of an agreement a nullity is disfavored inasmuch as “no part of [a] contract should be deemed superfluous.”

Den Norske Bank AS v. First National Bank of Boston,

75 F.3d at 54 (paraphrasing

Merchants National Bank v. Stone,

296 Mass. 243 , 5 N.E.2d 430, 433 (1936));

accord Federal Deposit Insurance Corporation v. Singh,

977 F.2d at 22 (“every word and phrase of an instrument is if possible to be given meaning”).

With these principles in mind, this court turns to the disputed language and the following principal areas of disagreement as set forth in the summary judgment motions: (1) the purchase price adjustment; (2) the accounts receivable adjustment; (3) the alleged breaches of warranty; (4) plaintiffs’ fraud and chapter 93A claims; and (5) Dawson’s fraud and chapter 93A claims.

A.

PURCHASE PRICE ADJUSTMENT

Dawson moves for partial summary judgment on the basis that it is entitled to take a purchase price adjustment in the amount of $4,402,235 under sections 1.5 and 1.6 of the stock purchase agreement. (Docket En-tryé257, 295, 308, 347, 351 & 356). Plaintiffs oppose partial summary judgment (Docket Entry # 341)

144

and incorporate by reference their 83 page statement of undisputed facts (Docket Entry #317) and their 158 page memorandum in support of their motion for partial summary judgment.

145

Plaintiffs also move for summary judgment on this issue (Docket Entrye315 & 318) which Dawson opposes (Docket Entry # 357).

Count V of the amended complaint seeks a declaratory judgment that Dawson is not entitled to any reductions in the purchase price pursuant to sections 1.5 and 1.6 (Docket Entry # 241, ¶ 113). Counterclaim VII of the amended answer and counterclaims requests declaratory relief that Dawson is entitled to purchase price adjustments under sections 1.5 and 1.6. (Docket Entry # 312, ¶ 112).

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Plaintiffs submit that Dawson did not cause Deloitte to audit the dosing balance sheet nor cause Deloitte to determine the adjusted closing net worth of Faxon within 60 days of the closing as required under section 1.6. Plaintiffs also assert that Dawson did not cause Deloitte to audit Faxon for the purpose of determining Faxon’s adjusted closing net worth. (Docket Entry # 318, pp. 92-99).

Dawson contends that Deloitte’s audit report, dated December 13, 1994, is timely. Dawson further maintains that the district judge already ruled on the issue of timeliness by the aforementioned endorsed orders in the context of the Turner agreement and, given the absence of prejudice, Dawson is therefore not foreclosed from claiming a purchase price reduction. Dawson additionally argues that Deloitte’s second audit constitutes a determination under section 1.6 and, if not, then the doctrines of either mutual mistake or impracticability preclude the forfeiture of a purchase price reduction claim.

The parties also vehemently dispute whether the calculation under subsection 1.5(g) requires the closing net worth of Fax-on to be adjusted from a consolidated to an unconsolidated basis.

1.

TIMELINESS

The critical language in the stock purchase agreement with respect to timeliness reads as follows:

ADJUSTMENT PROCEDURE. For purposes of Section 1.5, Buyer shall prepare, and cause Deloitte & Touche, the Company’s certified public accountants, at Buyer’s expense, (a) to audit in accordance with GAAP, within sixty days following the Closing Date, a balance sheet (“Closing Balance Sheet”) of the Company as of October 2, 1994 and (b) to determine the Adjusted Closing Net Worth.

The language places the onus on Dawson, as the buyer, to cause Deloitte to audit a closing balance sheet and also to cause Deloitte to determine the adjusted closing net worth of Faxon.

The 60 day requirement appears only under parenthetical (a), not parenthetical (b). Parenthetical enclosures such as (a) and (b) commonly enumerate a series of separate items.

The 60 day requirement is also separated by commas thereby modifying the preceding phrase “to audit in accordance with GAAP.” The nonrestrictive clause of “within sixty days following the Closing Date” describes its antecedent, “to audit in accordance with GAAP.”

See, e.g., Massachusetts Mutual Life Insurance Company v. Aritech Corporation,

882 F.Supp. at 195 . Ordinarily modifying clauses are placed as close as possible to the word[s] the clause modifies.

See Moulton v. Brookline Rent Control Board,

385 Mass. 228 , 431 N.E.2d 225, 227 (1982) (general rule of grammatical construction is that “modifying clause is confined to the last antecedent unless there is something in the subject matter or dominant purpose which requires a different interpretation”). Contrary to plaintiffs’ position, therefore, it is illogical for the clause “within sixty days following the Closing Date” to modify or describe a determination which appears in a separate parenthetical.

For similar reasons, it is also illogical for the words “For purposes of Section 1.5” to modify Deloitte as opposed to Buyer or the entire paragraph. Either of the latter two reasonable interpretations eliminates plaintiffs’ theory that Deloitte must perform the audit for the purpose of section 1.5.

See, e.g., Baker v. Central Intelligence Agency,

580 F.2d 664, 667-668 (D.C.Cir.1978) (introductory clause of statute did not impose requirement suggested by appellants and was simply preliminary pronouncement of purpose for the enactment);

Champion v. State of Alaska,

908 P.2d 454, 464 (Alaska App.1995) (recognizing that an introductory clause of a statute would modify all of the sections as opposed to only the first section). Plaintiffs’ desire to translate the phrase “For purposes of Section 1.5” to require that Deloitte must perform the audit for the purpose of taking a purchase price adjustment under section 1.5 is contrary to the “usual and ordinary significance,”

Woogmaster v. Liverpool & London & Globe Insurance Company,

45 N.E.2d at 395 , of the words employed. As an introductory clause, the phrase simply introduces the

*111

paragraph. It ties section 1.6, captioned “Adjustment Procedure,” to section 1.5, captioned “Adjustment.”

146

Although not without meaning, the introductory clause is not materially significant in the sense that it creates a contractual duty. It is neither a promise nor a condition imposed on Deloitte.

Accordingly, the agreement required De-loitte to perform the audit as opposed to the determination “within sixty days following the Closing Date,” i.e., December 13, 1994. The stock purchase agreement also contained a time is of the essence clause.

147

Viewing the record in plaintiffs’ favor for purposes of resolving Dawson’s summary judgment motion on this issue, an internal draft of the first audit report is date stamped December 15, 1994, although the first audit report is dated December 13, 1994.

148

The words of the agreement, however, are for Deloitte “to audit” by December 13, 1994, as opposed to produce an “audit report” by December 13, 1994.

In their statement of undisputed facts, plaintiffs admit that, “the December 13 date on the Deloitte audit report is the date that Deloitte completed its audit ‘field work.’ ”

149

(Docket Entry #317, p. 61). Robert H. Temkin (“Temkin”) opined that, “As a general rule, the date of the audit report is the date of the close of the field work.” (A.627). Even accepting Dawson’s position that the relevant date is the completion of the field work, however, there is an issue of disputed fact as to when Deloitte completed the field work for the first audit. On the one hand there is the December 13, 1994 date of the first audit report. On the other hand, there is a draft of the first audit report with a combined balance sheet which contains the notation, “Prepared by Cliff Silver 12/15/94” in the lower left hand corner.

150

Dawson further submits, however, that notwithstanding the time is of the essence clause, plaintiffs fail to show prejudice resulting from Deloitte’s delay of a few days. Dawson points out that the district judge already ruled in the context of the Turner agreement that Dawson would not forfeit its purchase price adjustment due to untimeliness. (Docket Entry #308, ¶ B; Docket Entry # 295, ¶ IV(A)(2); Docket Entry # 357, ¶ (I)(D)). As discussed below, because the first determination fails to satisfy the condition set forth in subsection 1.6(b) of the agreement and Dawson’s defenses of mutual mistake and impracticality fail, it is unnecessary to reach the untimeliness issue visa-vis the first audit. This court will, however, address the issue

supra

with respect to the second audit inasmuch as there is an

*112

issue of fact as to the sufficiency of the second determination.

Next, the parties dispute whether Deloitte performed the required determination. In order for Dawson to take a purchase price adjustment under section 1.5, the agreement set forth the condition that Dawson “shall .. cause Deloitte .... (b) to determine the Adjusted Closing Net Worth,” defined in section 1.5 to include the aforementioned adjustments.

It is undisputed that, using the first audit, Deloitte did not determine the adjusted closing net worth of Faxon within the meaning of sections 1.5 and 1.6. Instead, Connolly performed the adjustments under subsections 1.5(a) through (g) and thereby calculated Faxon’s “Adjusted Closing Net Worth.” Under the first audit, therefore, Dawson did not perform the condition of causing Deloitte to determine Faxon’s adjusted closing net worth. Absent mistake, impracticality or a material question of fact as to the second audit, plaintiffs are entitled to summary judgment on this issue.

151

It is an issue of fact with respect to the second audit as to whether in the summer of 1995 Deloitte, Faxon or Dawson determined the adjusted closing net worth, as defined in section 1.5 to include the adjustments under subsections (a) through (g). Footnote two to the financial statements attached to the second audit report contains the required adjustments and expressly refers to sections 1.5 and 1.6 of the stock purchase agreement. It is unclear, however, whether Deloitte, Dawson or Faxon made the determination reflected in the footnote. The second audit report, issued by Deloitte, refers to the financial statements which contain the footnote and opines that the financial statements fairly present Faxon’s financial position. In conducting an audit, Deloitte makes inquiries about the information in such notes attached to the financial statements. The only logical reason for conducting the second audit was to comply with subsection 1.6(b) and Paquette understood that the central purpose for the second audit was to accommodate Dawson vis-a-vis the purchase price adjustment.

There is, however, evidence to the contrary. The second audit report states that the financial statements are the responsibility of Faxon’s management. Paragraph 14 of the August 10, 1995 letter also states that Faxon determined the adjusted closing net worth and references sections 1.5 and 1.6. Other evidence in the summary judgment record also shows the existence of a factual dispute as to whether, in connection with the second audit, Deloitte, Faxon or Dawson determined the adjusted closing net worth within the meaning of subsection 1.6(b). The same evidence also establishes a factual dispute as to whether Dawson substantially performed this obligation, to wit, causing De-loitte to determine the adjusted closing net worth. Summary judgment in favor of either Dawson or plaintiffs on this issue is therefore inappropriate.

Dawson additionally argues that even if Deloitte’s determination falls short of complying with subsection 1.6(b), there was a mutual mistake because both parties assumed that Deloitte would agree to perform the determination. According to Dawson, neither party knew that Deloitte would refuse to perform the work at the time of the closing.

Dawson also raises the argument that De-loitte’s performance was impracticable.

152

According to Dawson, the doctrine of impracticability arises due to events subsequent to contracting, for instance, where Deloitte developed a policy against performing the determination after the closing. (Docket Entry #357, n. 23). In either situation, Dawson urges that its performance under subsection 1.6(b) is therefore excused. (Docket Entry # 308, ¶ C; Docket Entry # 295, ¶ IV(B)(2); Docket Entry # 357, ¶ 1(E)). Plaintiffs, of course, disagree with these contentions.

*113

Dawson’s efforts to avoid the impact of the condition precedent set forth in subsection 1.6(b) under either doctrine, however, are unavailing. Simply put, under the agreement Dawson assumed the burden of causing Deloitte to determine the adjusted closing net worth. It thereby also assumed the burden of obtaining Deloitte’s cooperation notwithstanding an internal Deloitte policy to avoid such undertakings due to increased liability risks. In other words, a party to an integrated agreement who undertakes to cause an independent accounting firm to make a determination about the adjusted net worth of the company being sold can fairly be required to secure the cooperation of the independent accounting firm in making the required determination.

See, e.g., Maloney v. Sargisson,

18 Mass.App.Ct. 341 , 465 N.E.2d 296, 300 (1984) (buyer claiming mutual mistake who, under agreement, undertook burden of making soil test “can fairly be required to secure soil tests made in locations ... prescribed by State and local regulations” and mistakes made performing tests are thus unilateral ones borne by buyer);

see generally Chase Precast Corporation v. John J. Paonessa Company, Inc.,

409 Mass. 371 , 566 N.E.2d 603, 606 (1991) (“principal question” under doctrine of impracticality and related doctrine of frustration is “ “whether an unanticipated circumstance,

the risk of which should not fairly be thrown on the promisor,

has made performance vitally different’ ”) (emphasis added).

The doctrine of mutual mistake allows the adversely affected party to void the contract at his election because “there has been no ‘meeting of the minds.’”

La-Fleur v. C.C. Pierce Company, Inc.,

398 Mass. 254 , 496 N.E.2d 827, 830 (1986). By definition, the mistake must be mutual, that is, it “must be shared by both parties.”

La-Fleur v. C.C. Pierce Company, Inc.,

496 N.E.2d at 830 . The mistake must also “relate to an essential element of the agreement.”

LaFleur v. C.C. Pierce Company, Inc.,

496 N.E.2d at 830 (citing

Cavanagh v. Tyson, Weare & Marshall Company, 221

Mass. 437, 116 N.E. 818, 820 (1917)).

153

Dawson’s underlying burden, as the party seeking to avoid the agreement through reformation, is to establish the mistake by “ ‘full, clear and decisive’ evidence.”

LaFleur v. C.C. Pierce Company, Inc.,

496 N.E.2d at 833 n. 10;

accord Polaroid Corporation v. Travelers Indemnity Company,

414 Mass. 747 , 610 N.E.2d 912, 917 (1993). Finally, “The parol evidence rule is no bar to the consideration of extrinsic evidence of intent when mistake is alleged.”

Mickelson v. Barnet,

390 Mass. 786 , 460 N.E.2d 566, 569 (1984);

accord Polaroid Corporation v. Travelers Indemnity Company,

414 Mass. 747 , 610 N.E.2d 912, 917 (1993).

There is sufficient evidence for a reasonable jury to find that the mistake as to Deloitte’s willingness to perform the determination was mutual. The assumption that Deloitte would make the determination also had a material effect on the agreed upon exchange, to wit, Dawson’s ability to reduce the purchase price.

See Restatement (Second) of Contracts

§ 152(1) (1981).

154

The mistake, however, did not concern a “basic assumption” of the agreement.

155

Cf. Malo-

*114

ney v. Sargisson,

465 N.E.2d at 299-300 (mistake about soil conditions which precluded lot from being a buildable lot in purchase and sale agreement for land constituted “basic assumption”). As acknowledged by Dawson, whether Deloitte or another reputable accounting firm performed the determination was not an essential part of the agreement. Whereas a mistake as to the size of the an apartment in a lease justifies relief as a mutual mistake,

see Golding v. 108 Longwood Avenue, Inc.,

325 Mass. 465 , 91 N.E.2d 342, 344 (1950), the character of ground fill in a contract to drive piles into the ground does not.

See Cavanagh v. Tyson, Weare & Marshall Company,

116 N.E. at 820 .

In the alternative, and even more noteworthy, whether viewing the record in Dawson’s favor for purposes of resolving plaintiffs’ summary judgment motion or viewing the record in plaintiffs’ favor for purposes of resolving Dawson’s summary judgment motion, the stock purchase agreement allocated the risk to Dawson to cause Deloitte to perform the determination. Dawson therefore bore the risk that Deloitte might prove unwilling to perform. Massachusetts cases “are substantially in accord with the articulation made in

Restatement (Second) of Contracts

§ 152 (1979).”

Maloney v. Sargisson,

465 N.E.2d at 299 (also citing to section 154);

Covich v. Chambers,

8 Mass.App.Ct. 740 , 397 N.E.2d 1115, 1121 (1979). Section 152 states the previously described general rule that:

Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party

unless he bears the risk of the mistake under the rule stated in § 15L

Restatement (Second) of Contracts

§ 152 (1981) (emphasis added).

156

Section 154 states the exception, applicable to both mutual mistakes under section 152 and unilateral mistakes under section 153,

157

that:

A party bears the risk of a mistake when

(a) the risk is allocated to him by the agreement of the parties, or

(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient....

Restatement (Second) of Contracts

§ 154 (1981). It is true that Connolly might not have been aware of his limited knowledge about Deloitte given his past experience with other accounting firms in the context of similar provisions. Connolly’s limited knowledge on a subjective basis, however, only speaks to his ability to take advantage of section 154(b). This case falls under section 154(a) inasmuch as the agreement placed the burden on Dawson to cause Deloitte to make the determination. As such, the circumstances more closely resemble those involving contracts wherein the parties assumed the risk,

Aldrich v. Travelers Insurance Company,

317 Mass. 86 , 56 N.E.2d 888, 889 (1944);

Maloney v. Sargisson,

465 N.E.2d at 299-300 ;

Covich v. Chambers,

397 N.E.2d at 1121-1122 , as opposed to a contract which did “not provide for [the] risk.”

Dover Pool & Racquet Club, Inc. v. Brooking,

366 Mass. 629 , 322 N.E.2d 168, 171 (1975).

Dawson also relies on the defense of impracticality. Dawson submits that “[t]his case falls squarely within the Restatement rule,” referring to section 271 of

Restatement (Second) Contracts

(1981).

158

(Docket Entry # 295, p. 22). Section 271 reads as follows:

*115

Impraeticality excuses the non-occurrence of a condition if the occurrence of the condition is not a material part of the agreed exchange and forfeiture would otherwise result.

Restatement (Second) of Contracts

§ 271 (1981).

159

Comment a to section 271 describes section 271’s relation to the other rules of impraeticality and notes that the impraeticality must “be such as would suffice to discharge a duty or prevent it from arising,” citing to sections 261 and 266(1) of

Restatement (Second) of Contracts

§ 271 comment a (1981).

The general statement of the impracticality doctrine is found in section 261 of

Restatement (Second) of Contracts

(1981). Comment e to section 261 is particularly apropos to the case at bar and states that:

Even if a party contracts to render a performance that depends on some act by a third party, he is not ordinarily discharged because of a failure by that party because this is also a risk that is commonly understood to be on the obligor.

Restatement (Second) of Contracts

§ 261 comment e (1981).

160

Even though Connolly had no personal experience in the past with accounting firms refusing to make similar determinations, it is, as noted above, reasonably foreseeable that a third party such as Deloitte might not perform under the agreement.

Thus, the nonperformance of a third party such as Deloitte is reasonably foreseeable and one of the risks Dawson undertook in the agreement. Under the agreement, Dawson undertook the duty to cause Deloitte to determine the adjusted closing net worth of Faxon. In so doing, Dawson also impliedly undertook the obligation that Deloitte would, in fact, perform the determination. De-loitte’s reluctance due to an internal policy against making such determinations is a risk allocated to Dawson under the contract.

See Chase Precast Corporation v. John J. Paonessa Company, Inc.,

666 N.E.2d at 605-606. As such, it is not fairly thrown upon plaintiffs even though, viewing the record in Dawson’s favor, plaintiffs suggested the use of Deloitte as opposed to Arthur Anderson.

161

In short, Dawson cannot avail itself of the defenses of mutual mistake and impracticability. Having already decided that the first determination did not comply with the agreement and that there exists an issue of fact as to the second determination, the issue arises whether the second audit was timely.

162

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Plaintiffs argue that the second audit “is untimely on its face.” Plaintiffs additionally point out that Dawson provides no explanation as to why Deloitte did not initially perform the additional procedures contained in the second audit in the first audit. (Docket Entry # 318).

In response, as well as to support its summary judgment motion, Dawson correctly points out that the language of subsection 1.6(a) only requires Deloitte to perform the audit of Faxon by the December 13, 1994 deadline. It does not require Deloitte to complete the audit report. It also does not require Dawson to deliver the audit to plaintiffs by the December 13,1994 deadline.

Dawson submits the following additional arguments.

163

First, Dawson contends that the district judge already decided the timeliness issue in the context of the Turner agreement.

164

Second, Dawson contends • that plaintiffs fail to show any prejudice from the delay due, in part, to the fact that Dawson has claimed but not taken or implemented the purchase price adjustment. Accordingly, any delay purportedly does not result in the forfeiture of Dawson’s purchase price adjustment.

165

To bolster this argument, Dawson also quotes section 11.4 of the agreement.

166

*117

Plaintiffs respond with the argument that Massachusetts strictly enforces “time is of the essence clauses,” particularly in agreements providing for the exercise of an option.

Addressing the arguments

seriatim,

the law of the case doctrine “ ‘expresses the practice of courts generally to refuse to reopen what has been decided.’ ”

Piazza v. Aponte Roque,

909 F.2d 35, 38 (1st Cir.1990). Once “ ‘a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.’ ”

Piazza v. Aponte Roque,

909 F.2d at 38 (quoting earlier edition of 18 James Wm. Moore

Moore’s Federal Practice

¶ 134.20[1] (1997)).

The doctrine, however, is inapplicable for two reasons. First, in this circuit, as well as in the eighth

167

and eleventh

168

circuits, the doctrine does not apply to interlocutory orders which the district court remains free to reconsider.

Perez-Ruiz v. Crespo-Guillen,

25 F.3d 40, 42 (1st Cir.1994);

Union Mutual Life Insurance Company v. Chrysler Corporation,

793 F.2d 1, 15 (1st Cir.1986). Second, even assuming its application, the law of the case doctrine does not apply where, as here, the issue was not decided, explicitly or implicitly, by the district judge.

See, e.g., Abbadessa v. Moore Business Forms, Inc.,

987 F.2d 18, 22 (1st Cir.1993);

Matter of Resyn Corporation,

945 F.2d 1279, 1282 (3rd Cir.1991);

see generally

18 James Wm. Moore

Moore’s Federal Practice

¶ 134.20[3] & ¶ 134.21[2] (1997) (doctrine applies to issues actually decided as opposed to statements made by court in passing or as dicta). The district judge only decided that, absent prejudice, the delay of ten days would not result in the forfeiture by Dawson of the remedy of arbitration.

See

Docket Entry # 119, p. 24. Here, the delay of more than seven months is far more lengthy than ten days. A decision on a ten day delay does not transform itself into a decision on a seven to eight month delay.

Turning to the absence of prejudice argument, it is necessary first to determine the meaning of the language in sections 1.5, 1.6 and 11.9. At first glance as well as upon closer inspection, the event of auditing Faxon in accordance with GAAP within 60 days following the closing date, i.e., on or before December 13, 1994, as well as the determination of Faxon’s adjusted closing net worth, was a condition precedent to effectuating the purchase price adjustment. As defined in Massachusetts, a condition precedent is “an event which must occur before a contract becomes effective or before an obligation to perform arises under the contract.”

Massachusetts Municipal Wholesale Electric Company v. Town of Danvers,

411 Mass. 39 , 577 N.E.2d 283, 288 (1991). Under Massachusetts law, it is generally, albeit not absolutely, necessary to use emphatic words to create a condition precedent.

Massachusetts Municipal Wholesale Electric Company v. Town of Danvers,

577 N.E.2d at 288 . Examples of such emphatic words include the word “if.”

Massachusetts Municipal Wholesale Electric Company v. Town of Danvers,

577 N.E.2d at 288 (citing

Restatement (Second) of Contracts

§ 226, comment a (1981)).

Here, the first sentence of section 1.5 reads that,

“If

[Faxon’s] Adjusted Closing Net Worth, as defined below, ... is less than $3,618,000,

then and only then,

the Purchase Price will be reduced.... ” (Emphasis added). To use the language of

Massachusetts Municipal,

the “event” or “condition precedent,” i.e., the adjusted net worth being less than $3,618,000, “must occur before a contract becomes effective,” i.e., must occur before the reduction of the purchase price becomes effective.

The words “Adjusted Closing Net Worth, as defined below” mean the net worth of Faxon “as shown on the Closing Balance Sheet (defined in Section 1.6)” subject to the adjustments in subsections. 1.5(a) through

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1.5(g).

169

Stated otherwise, Deloitte’s determination of the adjusted closing net worth begins with the net worth figure on the Closing Balance Sheet. The “Closing Balance Sheet” defined in section 1.6 is the audit, by December 13, 1994, of a balance sheet of Faxon. The event of creating the “Adjusted Closing Net Worth, as defined below,” therefore incorporated the requirement of an audit by December 13, 1994. Without such an audit, Deloitte could not even begin to determine the adjusted closing net worth.

In sum, both the audit by December 13, 1994, as well as the determination of the adjusted closing net worth figure arising from the audit were conditions precedent to the effectuation of the purchase price adjustment under sections 1.5 and 1.6. If a condition precedent “is not fulfilled, the contract, or the obligations attached to the condition, may not be enforced.”

Massachusetts Municipal Wholesale Electric Company v. Town of Danvers,

577 N.E.2d at 288 (citing

Restatement (Second) of Contracts

§ 225 (1981));

Cheschi v. Boston Edison Company,

39 Mass.App.Ct. 133 , 654 N.E.2d 48, 53 (1995.),

review denied,

421 Mass. 1102 , 655 N.E.2d 1277 (1995) (“[i]f the condition is not fulfilled, the contract, or the obligations attached to the condition, may not be enforced”);

see also Powers, Inc. v. Wayside, Inc. of Falmouth,

343 Mass. 686 , 180 N.E.2d 677, 681 (1962) (purchaser not entitled to specific performance due to expiration of time to exercise repurchase option; “[t]here being no contract, there can be no specific performance”);

Charles River Park, Inc. v. Boston Redevelopment Authority,

28 Mass. App.Ct. 795, 557 N.E.2d 20, 26 (1990),

review denied,

408 Mass. 1103 , 562 N.E.2d 90 (1990) (citing

Restatement (Second) of Contracts

§ 225 comment a and § 237 comment a (1981));

American Oil Company v. Katsikas,

1 Mass.App.Ct. 437 , 300 N.E.2d 204, 206 (1973) (at “expiration of the closing date ... contract was at an end, and both parties were discharged”). As expressed in section 225 of

Restatement (Second) of Contracts

(1981), “Unless [the condition] has been excused, the non-occurrence of a condition discharges the duty when the condition can no longer occur.”

Restatement (Second) of Contracts

§ 225(2) (1981).

Because the stock purchase agreement has a severability clause, however, the effect of the non-occurrence of the conditions precedent in sections 1.5 and 1.6 operates only to discharge the corresponding purchase price adjustment mechanism.

170

It does not operate to discharge either parties’ remaining obligations contained elsewhere in the agreement.

See generally

E. Allan Farnsworth

Farnsworth on Contracts

§ 8.13 (1990).

The contract language therefore required, as a condition precedent to the purchase price adjustment, that Dawson cause De-loitte to audit Faxon by December 13, 1994. Here, two sophisticated business parties negotiated an agreement and chose to insert the condition of an audit by December 13, 1994, into the agreement.

See, e.g., Cheschi v. Boston Edison Company,

654 N.E.2d at 53 . The delay at issue is seven to eight months as opposed to seven to ten days. Notwithstanding the alleged absence of prejudice, the parties to the agreement “did not require proof of prejudice as a condition of its enforcement.”

Cheschi v. Boston Edison Company,

654 N.E.2d at 53-54 (applying traditional contract principles and denying specific performance due to non-occurrence

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of condition precedent of prompt notification). Dawson’s failure to require Deloitte to audit Faxon by December 13,1994, therefore precluded the enforcement of the purchase price adjustment mechanism in sections 1.5 and 1.6.

The existence of the time is of the essence clause renders this result all the more certain. It is generally true that a party is not required to perform its promise if “there is an uncured material failure to perform” by the other party.

Mistler v. Horace Mann Insurance Company,

1994 WL 879038 at * 2-3 (Mass.Super.1994);

Restatement (Second) of Contract

§ 237 comment a (1981). Parties to an agreement can, however, insert a time is of the essence clause into an agreement and thereby make performance at the specified time “essential to one’s right to require performance of the other party.”

Federal Deposit Insurance Corporation v. Graham,

882 S.W.2d 890, 895 (Tex.App.1994);

cf. Luo v. Main Street

Associates, 212 A.D.2d 675 , 622 N.Y.S.2d 761, 761 (N.Y.A.D.2nd Dept.1995) (delay in performance where time not of “essence is not a material breach on which to base the equitable remedy of rescission”).

171

Notwithstanding these general principles of contract law, it is nevertheless Massachusetts law which controls the agreement and to which this court now turns with respect to the effect of time is of the essence clauses.

Under Massachusetts law, “Parties have a right to make a stated time for performance the essence of a contract.”

Porter v. Harrington,

262 Mass. 203 , 159 N.E. 530, 531 (1928). When not waived by either words or conduct, the provision “is binding and will be given effect by courts of equity as well as of law.”

Porter v. Harrington,

159 N.E. at 531 ;

accord Vickery v. Walton,

26 Mass.App.Ct. 1030 , 533 N.E.2d 1381, 1383 (1989) (“When parties agree in writing that time is to be of the essence, courts will hold parties to the deadlines they have imposed on themselves”);

American Oil Company v. Katsikas,

300 N.E.2d at 206 (absent waiver or modification by oral agreement, “contract provision terminating the agreement upon passage of the closing date without tender of performance must be given effect” resulting in discharge);

see also Federal Deposit Insurance Corporation v. Slinger,

913 F.2d 7, 11 (1st Cir.1990) (presence of time is of the essence clause created rebuttable presumption of discharge absent waiver, contrary provision, modification or estoppel);

Curley v. Mobil Oil Corporation,

860 F.2d 1129, 1132 (1st Cir.1988) (recognizing that although time for performance in agreement for sale of land, ordinarily, is not of the essence, “it ‘may be made so by clear manifestation of the intent of the parties in the contract itself ”).

In the case at bar, the parties did not simply insert a boilerplate clause stating simply that “time is of the essence.” As noted in the

Restatement (Second) of Contracts

§ 242 comment d (1981), cited by Dawson, “Such stock phrases as ‘time is of the essence’ do not necessarily have” the effect of creating a discharge.

Restatement (Second) of Contracts

§ 242, comment d (1981). “What the court must know, in order to give effect to such a cryptic provision is: What performance at what time is a condition of which party’s duty to do what?” Arthur Linton Corbin

Corbin on Contracts

§ 715 (1960). Here, the parties provided that, “With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.” The parties therefore agreed not just that time was of the essence generally but also that time was of the essence specifically with respect to the December 13,1994 audit date. Thus, performance of the audit by December 13, 1994, was a condition of effectuating the purchase price adjustment.

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There is little, if any, evidence of a waiver or of a modification of the time to perform the audit. The words used in the March 30, 1995 letter do not provide sufficient evidence of a waiver. There is no indication that plaintiffs knew the essential facts as to the first audit at that time.

The decision of

Quirk v. Schenk,

34 Mass. App.Ct. 931, 612 N.E.2d 1194 (1993),

review denied,

415 Mass. 1106 , 616 N.E.2d 809 (1993), is not to the contrary. In

Quirk ,

the parties entered into a purchase and sale agreement with a standard time is of the essence provision.

172

By agreement, the parties extended the closing three times. They executed the second extension after the expiration of the closing thereby evidencing an intent not to adhere strictly to the deadlines set in the agreement.

173

While the court in

Quirk

makes no mention of waiver or of the parties engaging in conduct inconsistent with rigid enforcement of the closing date, the cases cited by the court uniformly involve such circumstances.

See Church of God in Christ, Inc. v. Congregation Kehillath Jacob,

370 Mass. 828 , 353 N.E.2d 669, 672 (1976) (oral conversation and other conduct reasonably led the plaintiff to believe there was extension of agreement; waiver therefore resulted and time “was not of the essence”);

Gentile Brothers Corporation v. Rowena Homes, Inc.,

352 Mass. 584 , 227 N.E.2d 338, 342 (1967) (specific performance allowed inasmuch as purchaser had right to rely on oral agreement that parties would not carry out closing on June 5 which operated as “waiver of the provision of the purchase and sale agreement which made time of the essence”);

M. De Matteo Construction Company v. Daggett,

341 Mass. 252 , 168 N.E.2d 276, 281 (1960) (“conduct over the months ... reasonably led Construction’s representatives to understand .. that matters were to be held in abeyance ... and that Construction would be notified thereby rendering it inequitable to enforce time is of the essence clause and demand performance on particular date”);

Porter v. Harrington,

262 Mass. 203 , 159 N.E. 530, 531 (1928) (specific performance to convey land affirmed where party accepted overdue payments not made in accordance with contract terms, conduct amounted to waiver and thus “inconsistent with rigid insistence upon a clause of the contract” which characterized performance and time as being of essence);

Morgan v. Forbes,

236 Mass. 480 , 128 N.E. 792 , 794 (1920) (“evidence tending to show that the plaintiff did not reasonably expect he would be held to a strict performance of the contract”);

Lagasse v. Lagasse,

20 Mass.App.Ct. 911 , 478 N.E.2d 154, 157 (1985),

review denied,

395 Mass. 1103 , 481 N.E.2d 197 (1985) (where, “as here, the conduct of the parties demonstrates an intention to waive the time set for performance, the parties may set, or the court will establish for them, a reasonable time for performance;” citations omitted);

see also Gevalt v. Diwoky,

319 Mass. 715 , 67 N.E.2d 481, 482 (1946) (wherein there was no provision in contract making time of essence).

Dawson’s quotations of section 11.4 are also unavailing. This provision concerning waiver does not encompass a condition precedent which, as previously explained, is generally defined as “an event which must occur before a contract becomes effective or before an obligation to perform arises under the contract.”

Massachusetts Municipal Wholesale Electric Company v. Town of Danvers,

577 N.E.2d at 288 . Rather, the language unambiguously extends only to “any right, power or privilege under this Agreement.” In full, the pertinent sentence reads as follows:

Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power,

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or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege.

Extending this provision to conditions and/or duties under the agreement would nullify section 11.9 (the time is of the essence provision) as well as other provisions in the agreement.

See Vickery v. Walton,

26 Mass.App. Ct. 1030, 533 N.E.2d 1381, 1383 (1989) (enforcing deadline in standard written offer to purchase form which included time is of the essence provision and indicating that provision for the execution of a purchase and sale agreement could not be treated “as surplus-age”).

In short, the first audit and determination fail to comply with the agreement inasmuch as Deloitte made no determination of the adjusted closing net worth. The second audit, occurring an estimated seven to eight months after December 13,1994, is untimely. Dawson, which bore the risk under the agreement of Deloitte’s nonperformance, is therefore not entitled to take a purchase price adjustment under sections 1.5 and 1.6.

174

B.

ACCOUNTS RECEIVABLE ADJUSTMENT

Dawson moves for partial summary judgment consisting of a declaration that it acted properly in: (1) taking a set off of $4,533,283 on October 14, 1995; and (2) restoring all but $317,204 effective October 14, 1996. In so doing, Dawson seeks the dismissal of Count II of the amended complaint and portions of counts I, III, IV and V with respect to the accounts receivable claim. (Docket Entrye257, 294, 302, 357, 352 & 356).

Plaintiffs oppose Dawson’s motion and separately move for partial summary judgment on Count II of the amended complaint. (Docket Entrye315, 317, 318 & 342). Counterclaim VII of the amended answer and counterclaims requests declaratory relief that Dawson is entitled to purchase price adjustments under sections 2.8 and 8.2. (Docket Entry # 312, ¶ 112).

As an initial issue, section 2.8 unambiguously required plaintiffs to “deliver ... a complete and accurate” accounts receivable schedule of all accounts receivable of Faxon as of October 2,1994. The relevant language in the agreement states that, “Sellers will deliver to Buyer at the Closing a complete and accurate schedule (the ‘Accounts Receivable Schedule’) of all accounts receivable (individually on a gross basis) of the Company (the ‘Accounts Receivable’) as of October 2, 1994....”

The usual and ordinary meaning of the word “deliver” controls, unless it appears that the parties accorded the term a peculiar meaning.

See Woogmaster v. Liverpool & London & Globe Insurance Company,

45 N.E.2d at 395 (words in contract given “their usual and ordinary significance, unless it appears that they are to be given a peculiar or technical meaning”). It does not appear that the parties intended to accord the word “deliver” a legal, technical meaning.

See, e.g., Baetjer v. New England Alcohol Company,

319 Mass. 592 , 66 N.E.2d 798, 801 (1946) (construing the word “delivery” as including actual loading of goods onto the buyer’s vessel even though technical passing of title and payment occurred at the earlier time when goods were delivered into seller’s tank). The word “deliver” is commonly defined as “to carry or turn over to the intended recipient” or “to give to another’s possession or keeping.”

The Random House Dictionary of the English Language

(2d ed.1987);

see, e.g., ITT Corporation v. LTX Corporation,

926 F.2d 1258, 1263 (1st Cir.1991) (using dictionary definition to clarify meaning of terms “intermittent” and “intermittent current”). When used elsewhere in the agreement, the word takes on this common meaning.

175

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Thus, the word did not encompass simply making the accounts receivable schedule available at the Closing. Such an interpretation is contrary to the commonly accepted meaning of the word and the parties expressly added the words “made available” to “delivered” elsewhere in the agreement when they intended to have this effect.

176

It is also significant that the language describes a delivery “at the Closing.” Section 1.3 of the agreement defines the term “Closing” as “[t]he purchase and sale.” This section further identifies the location of the closing as “at the offices of [JSSA].” Whereas the words “the Closing” by themselves refer to the purchase and sale, the words “at the Closing” refer to the offices of JSSA. Moreover, the parties did not use the words “on the Closing Date,” as they did in subsection 1.4(a)(xi), which might have broadened the delivery requirement. Interpreting the delivery requirement in section 2.8 as requiring the delivery of an accounts receivable schedule at the offices of JSSA at the closing on October 14, 1994, also corresponds to the requirement in subsection 1.4(c) that, at the closing, the parties “shall also deliver such other documents, instruments and certificates as may be required by this Agreement.”

Given the factual disputes, however, it is a material issue of fact as to whether plaintiffs did “deliver” the accounts receivable schedule at the offices of JSSA within the meaning of the first sentence of section 2.8. An electronic copy of the accounts receivable would suffice provided it was complete and accurate and provided that Dawson could get access to it at the offices of JSSA. As previously noted, Zuroff testified that, “you could get access to it over the telephone at the closing.”

Section 2.8 also required plaintiffs to deliver a complete and accurate accounts receivable schedule at the closing. Whether the accounts receivable schedule was both complete and accurate, however, depends on the meaning and definition of the term “Accounts Receivable” and, in particular, whether the accounts receivable within the schedule would include gross debits in accounts receivable wherein the customer was in a net credit position. In other words, the completeness and accuracy of the schedule cannot be determined without defining its required contents. This court therefore turns to the meaning and definition of the term “Accounts Receivable.” Indeed, the parties focus much of their argument on the meaning of the term “Accounts Receivable.”

The determinative question is whether the language in sections 2.8 and 8.2 with respect to the term “accounts receivable” creates an ambiguity. In other words, does the contractual language concerning “accounts receivable” support two or more reasonable differences of opinion as to its meaning? The parties dispute whether the term means all gross receivables or the net receivables of those customers in a net debit position. If there is a reasonable difference of opinion, then this court may consider the parol evidence, such as the parties’ negotiations with respect to inserting the words “individually on a gross basis,” which party drafted various provisions and the motivations of the parties. Absent an ambiguity, the agreement is enforced according to its terms.

In determining the existence of an ambiguity, it is important to note that Faxon’s business consisted, in large part, of customers who prepaid for subscriptions for a future year several months prior to the beginning of the subscription year.

See Donoghue v. IBC USA (Publications), Inc.,

70 F.3d at 215-216 (describing exceptions to consideration of parol evidence including that court may consider parol and extrinsic evidence to determine whether contract language is ambiguous). Faxon posted the credit to the customer’s account but, because it was a prepayment, it could not necessarily apply the credit to an existing, unrelated debit in that customer’s account.

Turning to the language of sections 2.8 and 8.2, accounts receivable is initially defined as “all accounts receivable (individually on a gross basis) of the Company (the ‘Accounts Receivable’) as of October 2, 1994, in an aggregate amount which will be reflected on the Closing Balance Sheet....” An account typically includes debits as well as credits.

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Significantly, the parties chose to use the words “accounts receivable” as opposed to the words “gross debits” or “gross receivables.” Such a choice of language weighs heavily in favor of finding that the term “accounts receivable” refers to a net number. Furthermore, the closing balance sheet reflects a net number, i.e., the aggregate amount of those customers who had net debit balances in their accounts as of October 2, 1994.

177

This net number, however, conflicts with the language “individually on a gross basis” which rationally and objectively means a gross number.

178

In addition, grammatical rules of interpretation show that “gross basis” modifies the immediately preceding phrase, “all accounts receivable,” as opposed to the phrase accounts receivable schedule. Although additional language in section 8.2 slightly favors the use of a net number,

179

this court cannot simply ignore the contractual language “individually on a gross basis.”

See Den Norske Bank AS v. First National Bank of Boston,

75 F.3d 49, 54 (1st Cir.1996) (paraphrasing Massachusetts case “that, where possible, no part of contract should be deemed superfluous”).

Turning to the additional language in both sections 2.8 and 8.2, accounts receivable in section 2.8 are described as “current and collectible.” Such language could just as easily describe an account in a net debit position as a gross debit. Accounts receivable are also described as representing “valid obligations arising from sales actually made or services actually performed in the Ordinary Course of Business.” Again, such language could describe an account in a net debit position or a gross debit.

The final sentence in section 2.8 reads as follows:

Except for credits to libraries and other customers of the Company reflected in the Interim and Audited Balance Sheets, there is no contest, claim, or right of set-off, other than returns in the Ordinary Course of Business, in any agreement with any maker of an Accounts Receivable relating to the amount or validity of such Accounts Receivable.

This sentence, while not an example of the textbook use of the English language, does not favor either interpretation. If accounts receivable was a net debit number wherein credits had already been applied, there would arguably be no need to include the language excluding credits from the warranty. On the other hand, this sentence can be viewed as simply confirming that the warranty did not extend to credits or to returns in the ordinary course of business, i.e., that the warranty extended to a net debit number.

Additional language in section 8.2 also does not unequivocally favor either construction. Section 8.2 defines “Uncollected Receivables” as “the portion of the Accounts Receivable that was not collected during the Collection Period.” Reasonably, this language could describe the portion of the gross debits which remained uncollected as easily as it could describe the portion of the net debits which remained uncollected.

Additional language in section 8.2 describes the manner of applying a collection to items within a customer’s account. The relevant language reads that:

For purposes of determining collections against the Accounts Receivable,

180

collec

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tions from each customer will be applied against the oldest portion of the accounts receivable due from such customer to the Company, unless the customer specifies in writing that the payment is to apply to a specific invoice or it is otherwise clear from the circumstances that the payment applies to a specific invoice (in each of which cases the payment shall be applied to the applicable invoice).

This language simply clarifies the treatment of prepayment credits in a customer’s account. As clear from the circumstances or as expressly instructed by the customer, such prepayments would be applied to the invoice for the upcoming year’s subscription.

In sum, because the language yields reasonably differing interpretations, parol evidence is admissible to clarify the ambiguity. Unfortunately, the parol evidence, as explained in the factual background, is conflicting. Hence, there is a material issue of fact as to the meaning of the term “accounts receivable” which, when viewing the record in favor of the particular nonmoving party, precludes allowing either plaintiffs’ or Dawson’s summary judgment motions on this issue.

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C.

BREACHES OF WARRANTY

Dawson moves for partial summary judgment on liability only to the effect that: (1) plaintiffs misrepresented that the interim balance sheet was prepared in accordance with GAAP inasmuch as it contained knowing misrepresentations regarding the expected pay down of the Nihon Faxon intercompany debt; and (2) plaintiffs intentionally failed to provide Dawson with the June 30,1994 board minute showing the conversion of Nihon Fax-on intercompany debt into additional paid in capital in violation of section 2.5.

182

(Docket Entrye293, 304, 353, 356 & 357).

Plaintiffs oppose partial summary judgment on these issues. They also separately move for partial summary judgment on the allegations in Counterclaim V that they breached representations and warranties made in section 2 of the stock purchase

*125

agreement.

183

(Docket Entryé317, 318 & 340). In particular, plaintiffs argue that they did not breach sections 2.4, 2.5, 2.8, 2.11, 2.13, 2.17 and 2.25 of the stock purchase agreement. After addressing the alleged breaches of warranty under sections 2.4 and 2.5, this court will turn to plaintiffs’ summary judgment motion on the aforementioned breaches of warranty. Throughout, the record is construed in favor of the nonmovant.

1.

Section 24 and the Interim Balance Sheet

Dawson contends that plaintiffs violated section 2.4 by making a number of misrepresentations concerning the interim balance sheet. Because they seek summary judgment on liability only, this court need not determine the extent of the damage resulting from the alleged breach. Plaintiffs, in turn, move for summary judgment on Counterclaim V which alleges that plaintiffs breached the stock purchase agreement, including section 2.4, and the Turner agreement.

As a preliminary matter, it is necessary to define the parameters of the Interim Balance Sheet

184

for purposes of section 2.4. The parties disagree as to whether the Interim Balance Sheet consists of an entire document with 13 columns or simply one column.

The language of section 2.4 defines the term “Interim Balance Sheet.” The language therein refers to “an unaudited balance sheet of the Company as of July 29, 1994 (the ‘Interim Balance Sheet,’ a copy of which is attached hereto as

Schedule 24(b)).”

The import of this language is that the referenced balance sheet of Faxon was both unaudited and, more importantly, “as of July 29, 1994.”

Schedule 2.4(b) shows a balance sheet divided into 13 columns. At the top of each column is a date next to either the word “Balance” or the words “proj Balance,” i.e., projected balance. The only column with the date July 29,1994, is the fifth column. Here, the words “Proj Balance 07/29/94” appear above the entire column both on the first and second page of the two page balance sheet.

In addition, above the fifth column appear the handwritten words “Interim Balance Sheet” on the first page and “Interim Balance Sheet (Continued)” on the second page with an arrow pointing to the fifth column. The words “Interim Balance Sheet” appear only on top of the fifth column.

Consequently, the term “Interim Balance Sheet” is unambiguous.

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Notwithstanding Dawson’s argument to the contrary, the Interim Balance Sheet consists of the fifth and only the fifth column in schedule 2.4(b).

The parties also dispute whether the warranty in section 2.4 extended to the Interim Balance Sheet. Section 2.1 defines the term “Company” for purposes of section 2 as including the subsidiaries except for sections 2.3, 2.4 and 2.5. Unambiguously, therefore, the term “Company” in section 2.4 refers to Faxon on a domestic, unconsolidated basis.

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Section 2.4, which creates a warranty for certain financial statements, reads as follows:

2.4 FINANCIAL STATEMENTS. Sellers have delivered to Buyer the following consolidated financial statements (including in each case the notes thereto, if any): (a) audited balance sheets of the Company as of March 31 in each of the years 1990 through 1992 and unaudited balance sheets as of March 31 in each of the years 1993 and 1994 ... and (b) an unaudited balance sheet of the Company as of July 29, 1994 (the “Interim Balance Sheet,” a copy of which is attached hereto as

Schedule

2.4-(b)). Such financial statements and notes fairly present the financial condition and results of operations of the Company as at the respective dates thereof and for the period therein referred to, all in accordance with GAAP; the financial statements referred t

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