Sixth Circuit Reminds Us of the Importance of Careful Drafting

Sixth Circuit Reminds Us of the Importance of Careful Drafting

      In a recent decision, the Sixth Circuit Court of Appeals was called upon to interpret a buy-sell agreement.  In the course of that decision, the Court affirmed again the importance of careful drafting and as well as rules of contractual construction.  Howard v. Mercer Transportation Company, Inc., __ Fed. Appx. __, 2014 WL 2119150 (6^th Cir. May 21, 2014).

      This dispute arose out of the buy-sell agreement entered into amongst the shareholders of Mercer Transportation Company, Inc., which corporation was apparently an S-corporation.  It should be noted that all of the persons involved were corporate shareholders notwithstanding the fact that they are sometimes referred to as “partners.”

      After the death of one of the three owners, a dispute arose as to how the valuation provision of the buy-sell agreement should be interpreted.  Specifically, the agreement provided that the company would pay the estate “all earnings of the Corporation as reflected by the K-1 issued by the Corporation during the year of death and the five years thereafter.”  The dispute involved:

whether the phrase “during the year of the death and the five years thereafter” modifies “earnings” (the estate’s view) or “issued” (the company’s view). In other words: Does section 5.4 require the company to pay the estate its earnings (as reflected by the K-1 issued by the company) during the year of death and the five years thereafter—earnings from 2008 through 2013? Or does section 5.4 require the company to pay the estate its earnings that are listed in the K-1 forms issued by the company during the year of death and the five years thereafter—earnings from 2007 through 2012?

      Notwithstanding a contrary decision by the District Court, the Sixth Circuit unanimously held for the estate’s reading, finding that only it would give effect to other provisions of the document.  While the company was able to identify a fact situation, namely the death of the second shareholder, in which some conflict would exist between those provisions, the Court applied the rule that:

Kentucky law discourages an interpretation of the agreement that it will allow part of section 4.1 to “perish by destruction, unless insurmountable obstacles stand in the way of any other course.”  Siler v. White Star Coal Co., 226 S.W. 102, 104 (Ky. 1920) (internal quotation marks omitted).

      From there it went on to observe that:

But no principle of contract law suggests that an interpretation of an agreement that always makes one provision redundant wins out over an interpretation that sometimes makes that provision redundant.  2014 WL 2119150, *3.

      The Court also noted that extrinsic evidence would not be relied upon in interpretation until after “the resources of the paper itself [are] exhausted,” it citing Akins v. City of Covington, 97 S.W.2d 588, 590 (Ky. 1996).