filed: November 4, 1994; As Corrected November 10, 1994. Second Correction November 23, 1994.
On Appeal from the United States District Court for the Western District of Pennsylvania. (D.C. Civil No. 91-01959).
Before: Greenberg and Roth, Circuit Judges, and Fullam, District Judge*fn*
GREENBERG, Circuit Judge.
I. FACTUAL AND PROCEDURAL HISTORY
Allegheny Ludlum Corporation (Allegheny Ludlum), a company engaged in the business of designing, manufacturing and selling specialty steel products, appeals from an order for summary judgment entered against it in the district court. The appellee is Allegheny International, Inc. (Allegheny International), a Pennsylvania corporation formerly named Allegheny Ludlum Industries, Inc. Until mid-1979, Allegheny Ludlum was an operating division of Allegheny International but between mid-1979 and late 1980 was its wholly-owned subsidiary. At that time, Allegheny Ludlum was known as the Allegheny Ludlum Steel Corporation (Allegheny Ludlum Steel).
In late 1980, Allegheny International sold all of the outstanding common stock in Allegheny Ludlum Steel to the LSC Corporation, an entity formed by a group of Allegheny Ludlum Steel's senior managers. Following the sale, LSC Corporation was merged into Allegheny Ludlum Steel, which then became known as Allegheny Ludlum Corporation (Allegheny Ludlum). This action arises out of several agreements related to Allegheny International's sale of Allegheny Ludlum Steel.
To effectuate the sale of Allegheny Ludlum Steel, Allegheny International and LSC entered into a stock purchase agreement on November 26, 1980 (the 1980 stock purchase agreement).*fn1 See app. at 26-84. Pursuant to the agreement, on December 26, 1980, Allegheny International sold all of Allegheny Ludlum Steel's common stock to LSC. At the same time, Allegheny International acquired all of Allegheny Ludlum Steel's $9.00 Participating Preferred Stock. This controversy centers on two provisions of this agreement: (1) paragraph 12(d) and (e) regarding the Disposition of any post-closing tax benefits or detriments to Allegheny Ludlum for pre-closing tax periods; and (2) paragraph 5(e) regarding certain post-closing insurance to be maintained by Allegheny International on behalf of Allegheny Ludlum.
Paragraph 12(d) provides that LSC, now known as Allegheny Ludlum, would reimburse Allegheny International
to the extent of any tax benefit received by [LSC] in taxable periods subsequent to the Closing Time as a result of the adjustment in the taxable income or other tax attributes of [Allegheny Ludlum Steel] or [Oklahoma Tubular Products Company] or as a result of over payment of taxes for periods through and including the Closing Time. The reimbursement required by this section shall be made at the time any such tax benefit is determined by the filing of a tax return, amended tax return or otherwise.
See app. at 77.*fn2 Paragraph 12(e) provides that Allegheny International will reimburse LSC for any tax detriment suffered by LSC after the sale "as a result of any adjustments in the taxable income or other tax attributes of [Allegheny Ludlum Steel] or [Oklahoma Tubular Products Company] for periods through and including the Closing Time." Id. at 77-78. Paragraph 5(e) provides that Allegheny International
will keep the insurance set forth in Exhibit H in full force and effect [until the closing time] and thereafter for a reasonable time at [LSC's] request provided that [LSC] shall pay its allocable portion of the premiums and any claims thereunder shall be subject to any deductible of [Allegheny International] (and if a deductible applies to such loss as well as to some other loss sustained by [Allegheny International], to an allocable portion of such deductible).
See app. at 50. Allegheny International had maintained property and casualty insurance on behalf of Allegheny Ludlum Steel at least since 1976. Starting in 1976, these policies were written by Liberty Mutual Insurance Company, which charged Allegheny International for the cost of claims paid, an administrative cost adjustment, and a tax adjustment.
Following its acquisition by LSC, Allegheny Ludlum acquired certain insurance coverage in its own name which became effective July 1, 1981. In a letter agreement dated August 10, 1981 (the 1981 insurance agreement), Allegheny International and Allegheny Ludlum recognized that Allegheny Ludlum had "established its own separate property and casualty insurance program," but agreed that Allegheny International would continue to provide Allegheny Ludlum with certain specified policies and management services until December 31, 1981. Id. at 86. The 1981 insurance agreement also provided that Allegheny Ludlum would be
solely responsible for any insurance costs generated by or on behalf of [Allegheny Ludlum] under all previous programs established by [Allegheny International] for [Allegheny Ludlum]. Such costs would include but not be limited to audits, retrospective adjustments requiring additional premium payment, deductible payments or absorptions, renewals at the direction of [Allegheny Ludlum], etc.
In a letter dated April 13, 1983, Allegheny International informed Allegheny Ludlum that it had a net operating loss during its 1982 tax year, and that as a result, it had filed "carryback claims" for 1979 and 1980, years in which it had deducted the 1982 loss from its taxable income. Id. at 750. Originally, Allegheny International had offset a certain portion of its taxable income in 1979 and 1980 with investment tax credits generated by Allegheny Ludlum Steel's acquisition of equipment. However, because Allegheny International's subsequent net operating losses eliminated its taxable income for the tax years 1979 and 1980, it no longer needed the investment tax credits. It thus informed Allegheny Ludlum that the investment tax credits in those years should be used by Allegheny Ludlum to reduce its taxable income in 1981. Id. The investment tax credits were not available directly to Allegheny International, because they had been generated exclusively by Allegheny Ludlum Steel (Allegheny Ludlum's predecessor) when it was a wholly owned subsidiary of Allegheny International. Id. at 750 (letter from Allegheny International to Allegheny Ludlum); id. at 1312 (Allegheny Ludlum's amended income tax return for 1981 tax year).
Thus, in its April 1983 letter to Allegheny Ludlum, Allegheny International requested that Allegheny Ludlum use the newly available investment tax credits (previously used by Allegheny International for tax years 1979 and 1980) to file a claim for a refund for the 1981 tax year. Id. at 750. Allegheny International also requested that pursuant to paragraph 12(d) of the 1980 stock purchase agreement, Allegheny Ludlum reimburse it for the value of the investment tax credits and any interest received. Id.*fn3
Allegheny Ludlum promptly filed these claims. Id. at 1311. Moreover, in a letter dated April 22, 1983, Allegheny Ludlum responded to Allegheny International's April 13th letter, and stated that "[Allegheny Ludlum] will pay any reimbursement due to Allegheny International, Inc. (AI) resulting from the carryover of [the] 1979 and 1980 investment and foreign tax credits to 1981 as soon as possible after [Allegheny Ludlum] receives its refund check from the Internal Revenue Service." Id. at 752.
It was not until March 1989, three years after the execution of the 1986 agreement we discuss below, that the Internal Revenue Service (IRS) finally approved Allegheny International's reduction of its taxable income in 1979 and 1980 by the use of later net operating losses. Accordingly, only then did the IRS notify Allegheny Ludlum that its refund claim would be allowed. Id. at 1035. In July 1989, the IRS sent Allegheny Ludlum a check in the amount of $5,490,363.86, reflecting the amount of the tax refund ($2,233,059.75) plus interest at the statutory rate under the Internal Revenue Code to the date of the payment of the refund. Id. at 1636 (pretrial stipulations), id. at 801 (check).*fn4 The IRS sent Allegheny Ludlum a second check in December 1989 for $307,301.52, which included the balance of the refund, $246,257.25, plus additional interest. Id. at 1636 (pretrial stipulations), id. at 802 (check). Thus, Allegheny Ludlum received a total refund with interest of $5,797,665.38.*fn5
Before Allegheny Ludlum obtained the refund, Allegheny International had filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Pennsylvania on February 20, 1988. On May 27, 1988, Allegheny Ludlum filed a claim against Allegheny International for reimbursement of certain tax costs pursuant to paragraph 12(e) of the 1980 stock purchase agreement. Allegheny Ludlum and Allegheny International settled this claim with a stipulation dated February 27, 1989, which was approved by the bankruptcy court. The stipulation fixed the value of Allegheny Ludlum's claim against Allegheny International and provided that it was subject to a setoff of any amounts owed by Allegheny Ludlum to Allegheny International pursuant to the 1980 stock purchase agreement. See id. at 1674-76.
On August 9, 1989, Allegheny Ludlum informed Allegheny International that, based on its construction of a February 18, 1986 settlement agreement resolving numerous disputes between the parties, including a dispute over insurance matters, it intended to retain the refund the IRS sent it in July 1989. Id. at 804. In particular, in 1985 Allegheny International had filed suit against Allegheny Ludlum in a Pennsylvania state court, the Court of Common Pleas of Allegheny County, to recover insurance costs that it claimed Allegheny Ludlum owed it. In the February 18, 1986 agreement, Allegheny International stated that it would "withdraw and cause to be dismissed with prejudice as to all parties all legal proceedings" it initiated against Allegheny Ludlum, including this insurance matter. See 1986 agreement, at 2 (Allegheny Ludlum br. Tab F). The 1986 agreement provided in return that Allegheny Ludlum would "purchase and redeem from [Allegheny International] all of the 650,000 shares of issued and outstanding shares of the $9.00 participating Preferred Stock . . . of [Allegheny Ludlum] owned by [Allegheny International] for an aggregate consideration of 37 million dollars." Id. at 1. This redemption agreement had the advantage of effectuating a clean break between the corporations including the termination of Allegheny International's representation on the Allegheny Ludlum board of directors.
Finally, the 1986 agreement stated that Allegheny International would release Allegheny Ludlum from certain claims. Pursuant to the agreement, on February 28, 1986, Allegheny International delivered a release to Allegheny Ludlum. The first clause of this document contains broad language seemingly releasing Ludlum from any and all claims arising before February 19, 1986. The second clause, however, qualifies the first by excepting certain obligations under the November 26, 1980 agreement.
The language of this release is virtually identical to the language which the 1986 agreement prescribed for the release. See app. at 109-10. While the release refers to the agreement having been dated February 19, 1986, rather than February 18, 1986, that one-day difference is not significant, as it simply reflects the fact that Allegheny International's acceptance of the agreement was dated ...