Sterling Nat'l Bank v. Block

984 F.3d 1210

STERLING NATIONAL BANK, Plaintiff/Counterclaim Defendant-Appellant/Cross-Appellee,

v.Bernard N. BLOCK, et al., Defendants/Counterclaim Plaintiffs-Appellees/Cross-Appellants.

Nos. 19-2300

19-3122

19-3235

United States Court of Appeals, Seventh Circuit.

Argued September 23, 2020

Decided January 5, 2021

Peter C. Harvey, Attorney, PATTERSON, BELKNAP, WEBB & TYLER LLP, New York, NY, Paula Enid Litt, Attorney, Dennis Abdelnour, Attorney, HONIGMAN LLP, Chicago, IL, for Plaintiff-Appellant in 19-2300 and 19-3122.

George Desh, Attorney, Bruce N. Menkes, Attorney, MANDELL MENKES, LLC, Chicago, IL, for Defendants-Appellees in 19-2300 and 19-3122.

Peter C. Harvey, Attorney, PATTERSON, BELKNAP, WEBB & TYLER LLP, New York, NY, for Plaintiff-Appellee in 19-3235.

Bruce N. Menkes, Attorney, MANDELL MENKES, LLC, Chicago, IL, for Defendants-Appellants in 19-3235.

Before Sykes, Chief Judge, and Hamilton and St. Eve, Circuit Judges.

Hamilton, Circuit Judge.

In 2015, plaintiff Sterling National Bank purchased the Damian Services Corporation from its prior owners (the defendant Sellers). The stock purchase agreement set up an escrow of two million dollars available to resolve disputes that might arise after the purchase. The parties dispute here the right to the escrowed money. The issues are governed by the elaborate Stock Purchase Agreement in which the parties set up a comprehensive, custom-tailored set of rights, obligations, remedies, and procedures for resolving disputes.

Shortly after the purchase, a disgruntled former Damian employee called some of Damian's clients to tell them of a billing practice that the Sellers had instituted years earlier. When Sterling learned of the situation, it investigated with the help of a law firm and forensic accountant. After several months, Sterling concluded that under the Sellers’ management, Damian had overcharged its clients by over one million dollars. Sterling refunded these overpayments to each of its current clients, but not to any former clients.

Sterling then demanded indemnification from the escrow. Sterling claimed that the Sellers had misrepresented Damian's liabilities and vulnerability to litigation. The Sellers refused, leading to this lawsuit. The district court granted summary judgment to the Sellers on the theory that Sterling missed the seemingly strict deadline for claiming indemnification under the stock purchase agreement. The district court then denied the Sellers’ request for statutory pre- and post-judgment interest on the escrow money. Both sides have appealed.

We reverse summary judgment for the Sellers. Whether Sterling's demand for indemnification was late depends at best on disputed facts. Even if the demand was late, however, the agreement's elaborate terms provide that any delay could be held against Sterling only "to the extent that [Sellers] irrevocably forfeit[ ] rights or defenses by reason of such failure." Undisputed facts show that the Sellers have not irrevocably forfeited any claims or defenses, so the timing of Sterling's demand does not matter. We decline both sides’ invitations to decide the merits of Sterling's claims as a matter of law in the first instance. We agree with the district court's denial of pre- and post-judgment interest. We remand to the district court for further proceedings on the merits.

I. Factual and Procedural Background

A. Damian's Billing Practices

The Damian Services Corporation provides various administrative and payroll services to independent temporary staffing companies ("temp agencies"). To explain the parties’ dispute, we must explain how Damian serves and bills its clients. The baseline level of service, offered to "money-only" clients, is that Damian provides short-term payroll funding to pay the temp agencies’ employees. Damian offers other services to "full service" clients. Although Damian contracted with its temp agency clients, it invoiced the end-user companies that hired the temporary workers. The end-user employers would then pay Damian, which would, in turn, send the payments to the temp agencies after taking its cut as a fee for its services.

Damian encourages its client staffing agencies to obtain prompt payment from the end-user employers. If the end-user employers pay quickly, then the temp agencies can pay Damian faster and will be eligible for a discount. If an end-user waits too long and payment to Damian is delayed, Damian assesses a late fee to its client. The parties agree that Damian negotiated these discounts and fees (including timing) with every client temp agency. Despite variations in rates and other terms, however, the underlying client contracts always pegged these discounts and late fees to the invoice date.

The parties dispute the exact contours of Damian's billing and invoice-dating practices before the 2009 change. In broad brushstrokes, Damian would generally wait until it had received all the necessary information about each temporary employee's hours and rates before issuing an invoice. The invoice would thus be issued and dated some time after the workweek had ended—generally on a Friday, five business days after the preceding Sunday. Damian marketed this delay in processing payment as a benefit to potential clients.

In 2009, however, Damian began dating its invoices as of the last day of the workweek, that is, Sunday. The date listed on an invoice was thus earlier than not just the generation and remission of the invoice, but also, in some cases, even Damian's receipt of the information needed to generate it. This change gave Damian's clients a narrower window to receive early-payment discounts and a larger chance of being hit with late-payment fees. Sterling refers to this practice as a "backdating" scheme. For the sake of neutrality, we refer to it more blandly as "the 2009 change."

There is evidence that Damian took steps to hide the 2009 change from its clients. Damian never publicized the change, although it had previously alerted its clients to other changes in business practices that could affect them. There is also evidence that Damian developed a script for its employees to follow if a client ever complained. Employees were instructed to tell the complaining client that they would "look into it," would seek approval for a "change back" to the previous billing scheme, and, if a change were approved, would refund fees and tell the client that Damian would have caught the (deliberate) dating change by the end of the quarter. Several clients noticed and complained, but dozens of other did not.

B. Sale, Investigation, and Indemnification Demand

More than five years later, on February 27, 2015, the Sellers sold Damian to Sterling for a little over $25 million. Under what we call "the Agreement," the Stock Purchase Agreement at the center of these appeals, Sterling deposited two million dollars of the purchase price in an escrow account. If no disputes arose by December 31, 2015, one million dollars would be released to the Sellers, and the rest would be released in August 2016, eighteen months after closing.

In July 2015, soon after the closing, a former Damian employee began contacting Damian clients to expose the 2009 change. Sterling, which says it had not known before about the 2009 change, quickly investigated. It retained the law firm Wachtell, Lipton, Rosen & Katz to investigate. Sterling also placed an internal hold on all documents relevant to the investigation and told Damian's temp agency clients that it had uncovered a billing discrepancy. By August 11, 2015, Wachtell Lipton had prepared a preliminary memorandum on potentially fraudulent billing practices. The next day, Wachtell Lipton discussed its initial findings in a telephone call with the U.S. Attorney's Office in the Northern District of Illinois as a potential case of corporate fraud. Sterling also hired a forensic accounting firm, AlixPartners, which calculated that if the 2009 change had not occurred, Damian's clients would have saved $1,289,916 in discounts and avoided late fees.

As Wachtell Lipton wrapped up its investigation, it drafted another memorandum, dated November 27, and presented it to the U.S. Attorney's Office on December 2. The prosecutors declined to take up the case. Nine days later, on December 11, 2015, Sterling sent the Sellers a formal notice demanding indemnification under the Agreement. Before the Sellers responded, Sterling contacted each of Damian's then-current clients that it had determined had been overcharged and offered full refunds on the overcharges.

The Sellers rejected Sterling's demand. They said that the thirty-page demand did not provide sufficient detail on how the total amount was computed. The Sellers refused to participate in the Agreement's process for resolving indemnification claims. As a result of the dispute, no escrow funds have been released.

C. Procedural History

Sterling filed this suit in September 2016 seeking indemnification under the Agreement. Sterling's claims arise under state law; federal jurisdiction rests on diversity of citizenship. The operative complaint alleges that the Sellers’ failure to disclose the 2009 change and its consequences breached the Sellers’ representations and warranties in the Agreement, and that the Sellers breached the Agreement by refusing to indemnify Sterling. The Sellers counterclaimed for, among other things, a declaratory judgment holding that Sterling is not entitled to indemnification and that the Sellers are entitled to pre- and post-judgment interest at 12% on the money in escrow.

Sterling and the Sellers filed cross-motions for summary judgment. Sterling argued that undisputed facts showed that the Sellers are liable for breaching warranties and representations in the Agreement. The Sellers argued that Sterling failed to follow the Agreement's procedures for demanding indemnification. In the alternative, the Sellers argued that the 2009 change of invoice dates did not actually breach any underlying client contracts, so...