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Stanley Zalkind et al v. Ceradyne

April 27, 2011

STANLEY ZALKIND ET AL., PLAINTIFFS, CROSS-DEFENDANTS AND APPELLANTS,
v.
CERADYNE, INC., DEFENDANT, CROSS-COMPLAINANT AND APPELLANT.



Appeals from a judgment of the Superior Court of Orange County, Gregory H. Lewis, Judge. Affirmed. Super. Ct. No. 30-2008-00107859

The opinion of the court was delivered by: Fybel, J.

CERTIFIED FOR PUBLICATION

OPINION

INTRODUCTION

Ceradyne, Inc. (Ceradyne), entered into an asset purchase agreement (Asset Purchase Agreement) with Stanley Zalkind and Elizabeth Zalkind (the Zalkinds) and Quest Technology, LP (Quest), a limited partnership owned by the Zalkinds. Under the terms of the Asset Purchase Agreement, Ceradyne purchased all of Quest's assets for a price of $2.44 million, of which $300,000 was paid in cash and the remainder paid with unregistered shares of Ceradyne stock.

The Zalkinds and Quest later sued Ceradyne, asserting a single cause of action for breach of contract. The Zalkinds and Quest alleged Ceradyne breached the Asset Purchase Agreement by not obtaining timely registration with the Securities and Exchange Commission (SEC) of the Ceradyne stock. Ceradyne filed a cross-complaint against the Zalkinds and Quest, asserting a single cause of action for securities fraud in violation of Corporations Code section 25401. Ceradyne alleged the Zalkinds made misrepresentations and omitted material facts to inflate the value of Quest's assets.

Ceradyne moved for summary judgment on the complaint, and the Zalkinds and Quest moved for summary judgment on the cross-complaint. The trial court granted both motions, and all parties have appealed.

We affirm in full. As to Ceradyne's summary judgment motion, we conclude the Zalkinds and Quest's complaint was time-barred because it was not filed within the 24-month limitations period in section 14.4 of the Asset Purchase Agreement. We hold that the Asset Purchase Agreement's definition of indemnification and damages included the Zalkinds and Quest's direct claim for breach of contract against Ceradyne. We also hold the limitations period is reasonable and enforceable.

As to the Zalkinds and Quest's summary judgment motion, we conclude that under Corporations Code section 25501, Ceradyne has no damages and cannot obtain rescission of the Asset Purchase Agreement. We hold the term "the complaint" referred to in section 25501's definition of a seller's damages means the pleading filed by the seller of the security that asserts a violation of Corporations Code section 25401 (here, Ceradyne's cross-complaint).

FACTS

Ceradyne designs and manufactures advanced technical ceramic products for industrial, automotive, defense, and commercial uses. Quest, a limited partnership, was an original equipment manufacturer of injection-molded ceramic components. As of May 2004, the Zalkinds owned a 99 percent interest in Quest.

In May 2004, the Zalkinds and Quest entered into the Asset Purchase Agreement with Ceradyne, by which the Zalkinds agreed to sell Quest's assets to Ceradyne for $2.44 million, of which $300,000 was paid in cash and the balance paid with unregistered shares of Ceradyne (the stock consideration).

Section 8.10 of the Asset Purchase Agreement required Ceradyne to use its best efforts to register the stock consideration with the SEC. Registration would permit the stock consideration to be publicly traded. Ceradyne was required to file a form S-3 registration statement within 30 days of the closing date of the Asset Purchase Agreement. Section 3.1(b)(ii) of the Asset Purchase Agreement provides: "If the Registration Statement covering the Stock Consideration is not declared effective by the SEC on or before November 30, 2004, then within ten (10) days of such date, [Ceradyne] shall make a cash payment to the Selling Parties in the amount of $2,140,000, against delivery by the Selling Parties to [Ceradyne] of duly-endorsed stock certificates constituting the Stock Consideration."

Section 14 of the Asset Purchase Agreement is entitled "Indemnification." Section 14.2 provides that Ceradyne "shall indemnify, hold harmless and defend the Selling Parties and their respective successors and assigns . . . from and against any and all Damages that arise from or are in connection with: [¶] (a) Any breach of or inaccuracy in any of the representations or warranties of any of [Ceradyne] contained in Section 6 of this Agreement or in any of the certificates delivered hereunder by or on behalf of [Ceradyne] pursuant to such representations or warranties; or [¶] (b) Any breach or default by [Ceradyne] of its covenants or agreements contained in this Agreement." Section 14.1 similarly provides that Quest and Stanley Zalkind agree to "indemnify, hold harmless and defend" Ceradyne from and against any and all "Damages."

Section 14.3 of the Asset Purchase Agreement states: "'Damages,' as used in this Section 14, shall mean: (i) demands, claims, actions, suits, investigations and legal or other proceedings brought against any indemnified party or parties, and any judgments or assessments, fines or penalties rendered therein or any settlements thereof, and (ii) all liabilities, damages, losses, Taxes, assessments, costs and expenses (including, without limitation, reasonable attorneys' and accountants' fees and expenses) incurred by any indemnified party or parties, to the extent not reimbursed or paid for by insurance, whether or not they have arisen from or were incurred in or as a result of any demand, claim, action, suit, assessment or other proceeding or any settlement or judgment."

Section 14.4(a) of the Asset Purchase Agreement provides that "[n]o claim for indemnification under this Section 14 may be made more than twenty-four (24) months after the Closing Date [May 14, 2004]," with exceptions not applicable here.

Pursuant to the Asset Purchase Agreement, the Zalkinds received 71,397 shares of Ceradyne common stock based on the average closing price of $29.973 per share for the 10 days preceding the closing date of May 14, 2004. These shares grew to 107,095.5 after Ceradyne had a three-for-two stock split.*fn1

On August 19, 2004, Ceradyne filed the form S-3 registration statement with the SEC for the stock consideration. On September 28, 2004, Stanley Zalkind and Ceradyne's chief financial officer agreed to extend the Asset Purchase Agreement's deadline for registering the stock consideration in section 3.1(b)(ii) for one month from the original date of November 30, 2004. Between November 2004 and March 2005, Ceradyne filed three separate amendments to the form S-3 in response to correspondence from the SEC. The Zalkinds did not invoke section 3.1(b)(ii) of the Asset Purchase Agreement and demand $2.14 million in cash from Ceradyne for failure to timely register the stock consideration. On March 15, 2005, the SEC declared the registration of the stock consideration to be effective.

By April 15, 2005, the Zalkinds had sold 106,500 shares of the stock consideration. Their proceeds from the public sales were $2,351,669.61 based on an average selling price of $22.08 per share.

After May 14, 2004, Quest was operated as a division of Ceradyne with Stanley Zalkind and other key employees still in place. For the remainder of 2004, the Quest division had sales of about $1 million and net income of about $41,000. In 2005, the Quest division experienced a net loss of $33,814, in 2006 a loss of $564,576, and in 2007 a loss of $696,598. In 2007, Ceradyne terminated Stanley Zalkind's employment.

PROCEDURAL HISTORY

In June 2008, the Zalkinds and Quest filed a complaint against Ceradyne, alleging breach of the registration requirements of section 8.10 of the Asset Purchase Agreement. The Zalkinds and Quest filed a first amended complaint, the operative pleading, in October 2008.

The first amended complaint alleged that Ceradyne breached section 8.10 of the Asset Purchase Agreement by failing to file the form S-3 registration statement within 30 days of May 14, 2004, and by failing to use best efforts to cause the stock consideration to be registered by the SEC. The first amended complaint also alleged the delay in registering the stock consideration meant the Zalkinds could not take advantage of a temporary and significant rise in the price of Ceradyne shares between December 31, 2004 and January 12, 2005. The Zalkinds were damaged, according to the first amended complaint, because if they had been able to sell their Ceradyne shares during that time period, they would have realized $1,479,444.50 more than they ultimately did.

After conducting discovery, Ceradyne filed a cross-complaint against the Zalkinds and Quest in May 2009. The cross-complaint asserted a single cause of action for violation of Corporations Code section 25401 and alleged the Zalkinds made a series of false and misleading statements and omissions of material fact about Quest's revenue projections and customer and market opportunities to induce Ceradyne to enter into the Asset Purchase Agreement and purchase Quest's assets. The cross-complaint sought damages and rescission of the Asset Purchase Agreement.

Ceradyne moved for summary judgment on the first amended complaint on the ground, among others, the Zalkinds and Quest's lawsuit constituted a claim for indemnification under section 14 of the Asset Purchase Agreement but was not filed within 24 months of the closing date of May 14, 2004. The Zalkinds and Quest moved for summary judgment on the cross-complaint on the ground, among others, that Ceradyne suffered no damages under Corporations Code section 25501.

The trial court took the motions under submission after hearing argument of counsel and issued a minute order on November 6, 2009, granting both motions. On December 2, the court signed an order submitted by the Zalkinds and Quest, stating: "Plaintiffs' summary judgment motion is granted with respect to the Cross-complaint on the grounds Cross-Complainant has not suffered any damages and rescission is unavailable because the parties cannot be returned to the status quo ante. Summary judgment i[s] not warranted on any other bases proffered by Plaintiffs. [¶] . . . Cross-[complainant]'s summary judgment motion is granted with respect to the Complaint on the grounds the two-year limitations provision in section 14.4 of the Asset Purchase Agreement executed by the parties bars Plaintiffs' claims. Summary judgment i[s] not warranted on any other bases proffered by Cross-complainant[]."

Judgment was entered on December 14, 2009. After entry of judgment, Ceradyne moved to correct a "clerical error" in the order granting summary judgment, or, alternatively, for reconsideration. In the motion, Ceradyne asserted the statement "Summary judgment i[s] not warranted on any other bases proffered by Cross-complainant[]" was inconsistent with the trial court's tentative ruling, argument and findings at oral argument, and the court's minute order. Ceradyne also asserted the order granting summary judgment did not comply with Code of Civil Procedure section 437c, subdivision (g). The trial court denied the motion, stating: "Any error in including that statement without stating the grounds for it would be judicial not clerical error. The Court intended to include the statement in the order."

STANDARD OF REVIEW

"A trial court properly grants summary judgment where no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law. [Citation.] We review the trial court's decision de novo, considering all of the evidence the parties offered in connection with the motion (except that which the court properly excluded) and the uncontradicted inferences the evidence reasonably supports. [Citation.]" (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476.)

DISCUSSION: The Zalkinds and Quest's Appeal

The trial court concluded the Zalkinds and Quest's complaint was time-barred because it was not filed within the 24-month limitations period prescribed by section 14.4 of the Asset Purchase Agreement. It was undisputed the Zalkinds and Quest filed their lawsuit for breach of contract against Ceradyne more than 24 months after the closing date. If the lawsuit for breach of contract filed by the Zalkinds and Quest is a "claim for indemnification" under section 14 of the Asset Purchase Agreement, then their complaint is time-barred.

After examining the language of section 14 of the Asset Purchase Agreement and relevant law on the meaning of indemnification, we agree with Ceradyne the term "claim for indemnification" as used in the Asset Purchase Agreement includes the Zalkinds and Quest's breach of contract action.

I. THE ZALKINDS AND QUEST'S COMPLAINT WAS TIME-BARRED BECAUSE IT WAS NOT FILED WITHIN THE 24-MONTH LIMITATIONS PERIOD IN SECTION 14.4 OF THE ASSET PURCHASE AGREEMENT.

A. The Issue: Does the Term "Indemnify" in Section 14.2 of the Asset Purchase Agreement Include Direct Actions Between the Parties?

Section 14.4 of the Asset Purchase Agreement states, in relevant part, "[n]o claim for indemnification under this Section 14 may be made more than twenty-four (24) months after the Closing Date . . . ." If a lawsuit for breach of contract is a "claim for indemnification" under section 14 of the Asset Purchase Agreement, then the Zalkinds and Quest's complaint is time-barred.

What does "claim for indemnification" under section 14.4 of the Asset Purchase Agreement mean?

The Zalkinds and Quest argue indemnification under section 14.4 of the Asset Purchase Agreement covers "only claims involving liability or potential liability to third parties or obligations imposed on a party by operation of law" and therefore does not apply to their direct claims against Ceradyne for its alleged breach of the Asset Purchase Agreement. Ceradyne argues the 24-month limitations period of section 14 applies to the Zalkinds and Quest's complaint because section 14 was drafted broadly to encompass "both direct, garden variety breach of contract claims between the parties and claims arising from third parties."

The parties agree the Asset Purchase Agreement was a fully integrated contract and there is no extrinsic evidence relating to section 14.*fn2 (Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., supra, 109 Cal.App.4th at pp. 953-954.) We therefore look to the language of the Asset Purchase Agreement itself. (Id. at p. 956.) "The basic goal of contract interpretation is to give effect to the parties' mutual intent at the time of contracting. [Citations.] When a contract is reduced to writing, the parties' intention is determined from the writing alone, if possible. [Citation.] 'The words of a contract are to be understood in their ordinary and ...


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