On appeal from the Superior Court of New Jersey, Law Division, Mercer County, Docket No. L-1926-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted October 25, 2011
Before Judges Messano and Yannotti.
Plaintiffs appeal from an order entered by the Law Division on November 12, 2010, granting summary judgment in favor of defendant Stark & Stark, P.C. (S&S). We reverse.
Plaintiff Mahesh Uberoi (Mahesh) and Madhu Uberoi were the owners of Uberoi International, Inc. (UII). In 2001, Cognicase, Inc. (Cognicase) approached the Uberois and expressed an interest in acquiring UII. On May 1, 2001, Cognicase submitted an offer in the form of an Expression of Interest and Term Sheet to the Uberois. The May 1, 2001 Term Sheet stated that Cognicase offered to purchase all of UII's issued and outstanding shares for $1 million in cash, and the equivalent of $3.25 million in Cognicase shares.
The May 1, 2001 Term Sheet also stated that the Uberois would guarantee that the ratio of UII's working capital to liabilities (WCR) would not be less than 1 to 1, and UII shall not have any long-term indebtedness, except for a $32,000 loan payable to Sovereign Bank (Soverign). The Term Sheet stated that in the event that the WCR was not met as of the time of closing, an adjustment to the purchase price would be made for each $1 in working capital shortfall.
On June 28, 2001, Cognicase provided the Uberois with another Expression of Interest and Term Sheet. The June 28, 2001 Term Sheet stated that Cognicase offered to purchase the UII stock for $750,000 in cash and the equivalent of $2,850,000 in Cognicase shares.
The June 28, 2001 Term Sheet also stated that the Uberois would guarantee that UII's WCR at the time of closing would be not less than 1 to 1, and UII did not have any long-term indebtedness except for the $32,000 Sovereign loan. The Term Sheet additionally stated that in the event UII's WCR was not 1 to 1, an adjustment to the purchase price would be made for each $1 of working capital shortfall.
Mahesh negotiated the stock sale with John Valentini (Valentini), the Executive Vice President and Chief Executive Officer of Cognicase. Mahesh signed the June 28, 2001 Expression of Interest, thereby indicating that the Uberois wanted to move forward with the sale of their stock. On July 18, 2001, Congicase's attorney distributed the initial draft of the Stock Purchase Agreement (SPA). The second draft of the SPA was distributed on July 22, 2001.
Among other things, the first and second drafts of the SPA stated that if as of the closing date, UII had a WCR of 1.4 to 1, or outstanding indebtedness other than the balance due on the $32,000 Sovereign loan, the Uberois would have an obligation to pay Cognicase cash equal to the amount necessary to pay UII's outstanding indebtedness as of the closing date, plus an amount required to reduce the company's WCR to 1.4 to 1, multiplied by 1.5. This draft of the SPA stated that WCR "shall mean the ratio of current assets to current liabilities of [UII], in each case, as reflected on the Final Closing Balance Sheet [FCBS], and determined in accordance with generally accepted accounting principles [GAAP]."
The Uberois retained S&S to provide them with legal advice regarding the SPA. Allen M. Silk of S&S wrote to Mahesh on July 24, 2001, and stated that the firm had been asked to review the SPA and provide written comments on the agreement for a fixed fee. Mahesh signed the letter on July 27, 2001, indicating his agreement and acceptance of the terms and conditions stated therein. S&S assigned attorney Lawrence Cohen (Cohen) to the matter. S&S was provided with the second draft of the SPA.
On August 1, 2001, a third draft of the SPA was provided to S&S. Section 1.03(a) in this draft, which dealt with UII's WCR, was the same as that set forth in the two earlier drafts of the agreement. In August 2001, the fourth, fifth, sixth and seventh drafts of the SPA were prepared. The language of Section 1.03(a) remained unchanged.
The eighth and final draft of the SPA was prepared on the evening of August 15, 2001 and forwarded to S&S. The final version of the SPA included a change to Section 1.03(a), which was modified to state that WCR "shall mean the ratio of current assets to current liabilities (current liabilities include the Deutsche Financial Services revolving line of credit) of [UII], in each case, as reflected in the Final Closing Balance Sheet, and determined in accordance with" GAAP.
The parties executed this last version of the agreement, and the closing took place on August 17, 2001. In accordance with the SPA, Cognicase placed $500,000 in escrow to address potential post-closing adjustments to the purchase price. Thereafter, Cognicase provided the Uberois with the Final Closing Balance Sheet, which calculated UII's WCR as of the date of closing by including the amounts due on the Deutsche Financial Services line of credit (the Deutsche LOC).
Based on that calculation and other claimed discrepancies in UII's reported financial condition, Cognicase said that additional monies were due from the Uberois. The Uberois disputed the claim. Mahesh asserted, among other things, that the inclusion of the Deutsche LOC as a current liability for purposes of determining UII's WCR at the time of closing was inconsistent with the agreement he reached with Cognicase.
Mahesh raised the issue with S&S, which wrote to him on August 13, 2003. In that letter, S&S conceded that it did not notice that the definition of WCR in the final agreement had been modified to state that the Deutsche LOC was to be considered a current liability for purposes of calculating UII's WCR. S&S stated that the change had not been "redlined or otherwise highlighted" in the document it ...