-BLM Irving v. Ebix Software India Private Limited et al, No. 3:2010cv00762 - Document 17 (S.D. Cal. 2010)
Court Description: ORDER granting in part and denying in part 4 Motion for Writ of Attachment: The motion is granted as to the second and third alleged improper deductions,denied as to the first improper deduction, and granted in part and denied in part with respect to interest owed. Therefore, the Court hereby issues a writ of attachment in the amount of $319,192.41. Signed by Judge Janis L. Sammartino on 8/10/10. (lmt)
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-BLM Irving v. Ebix Software India Private Limited et al Doc. 17 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 CRAIG A. IRVING, CASE NO. 10-CV-762 JLS (BLM) Plaintiff, 12 ORDER: GRANTING IN PART AND DENYING IN PART MOTION FOR WRIT OF ATTACHMENT vs. 13 14 EBIX, INC.; EBIX SOFTWARE INDIA PRIVATE LIMITED, (Doc. No. 4) 15 Defendants. 16 17 18 19 20 21 22 23 24 25 26 27 28 Presently before the Court is Plaintiff’s motion for a writ of attachment. (Doc. No. 4) Also before the Court are Defendants’ opposition and Plaintiff’s reply. (Doc. Nos. 10 & 13.) The Court GRANTS IN PART and DENIES IN PART Plaintiff’s motion. BACKGROUND Plaintiff Craig Irving brings this suit against Defendants Ebix, Inc. and Ebix Software India Private Limited on behalf of the shareholders of ConfirmNet Corporation. (See Compl. ¶¶ 1–3.) He wishes “to enforce [the shareholders’] entitlement to the full amount of the ‘Second Earn Out’ plus interest, pursuant to an Agreement and Plan of Merger . . . [between] Ebix, Inc., ConfirmNet Corporation, Ebix Software India Private Limited, ConfirmNet Acquisition Sub, Inc., and Plaintiff Shareholders’ Representative.” (Id. ¶ 2.) The parties entered into this agreement on November 24, 2008. (Id. ¶ 8.) The agreement provided the holders of ConfirmNet Corporation with, inter alia, cash at the time of the closing and -1- 10cv762 Dockets.Justia.com 1 future contingent consideration. (See Compl., Ex. A (Merger Agreement) §§ 1.2(a) & (b).) The 2 contingent consideration consisted of three “Earn Outs.” (Id. § 1.2(b).) These payments were to be 3 calculated as multiples of either Ebix’s gross revenue or incremental increase in gross revenue, 4 depending on the “Earn Out” period. (Id.) 5 The “Second Earn Out,” the subject of dispute here, consisted of “cash consideration 6 equivalent to 1.538 times the incremental increase, if any, of Gross Revenue for the 12-month period 7 beginning January 1, 2009 as compared to the Gross Revenue for the 12-month period beginning 8 January 1, 2008.” (Id.) Defendants were to pay the “Second Earn Out” promptly after financial 9 results for the 12-month period beginning January 1, 2009 are tabulated . . . (but in no event later than 10 30 days after the end of calendar year 2009).” (Id.) Additionally, Defendants were also required by 11 the Agreement to “deliver to each Shareholder a copy of the financial statements . . . and a certificate 12 showing the calculation of the Contingent Merger Consideration for the applicable period, certified 13 by the Chief Financial Officer of Parent to be a good faith calculation of the Contingent Merger 14 Consideration derived from the accounting records of [Defendant] (‘Contingent Gross Revenue 15 Certificate’).” (Id. § 1.2(b)(i).) 16 Plaintiff alleges that Defendants did not timely pay the “Second Earn Out,” nor did they deliver 17 the Contingent Gross Revenue Certificate. (Compl. ¶ 12.) On February 12, 2010, Defendants 18 allegedly proposed a Second Earn Out schedule to which Plaintiff responded with requested revisions. 19 (Id. ¶ 13.) Plaintiff also claims that on March 9, 2010 Defendants agreed to the suggested revisions 20 and stated that the money would be transferred on March 11, 2010. (Id. ¶ 14.) Defendants shortly 21 thereafter informed Plaintiff of a new deduction, did not transfer the money at the time designated. 22 (Id.) On March 12, Defendants delivered the Contingent Gross Revenue Certificate for the Second 23 Earn Out, which indicated that the payment would be “nearly $550,000 less than the amount to which 24 the parties agreed three days earlier.” (Id. ¶ 15.) Defendants also stated “that they would not make 25 any payment to Plaintiff . . . unless and until Plaintiff . . . agreed to accept almost $550,000 (exclusive 26 of interest) less than was owed.” (Id. ¶ 20.) Plaintiff threatened to sue unless Defendants paid the full 27 amount Plaintiff expected. (Id. ¶ 21.) On March 26, 2010, Defendants transferred $2,975,386 to 28 Plaintiff. (Id.) Because this was not the full amount Plaintiff believed owed on the Second Earn Out -2- 10cv762 1 and did not include interest, Plaintiff filed suit on April 12, 2010. (Id.) 2 LEGAL STANDARD 3 Federal Rule of Civil Procedure 64(a) allows a party to invoke any remedy for seizing property 4 allowed under the law of the state in which the district court sits. In California, writs of attachment 5 are governed by the Civil Procedure Code sections 481.010 through 493.060. Section 484.90(a) sets 6 forth four elements that the Plaintiff must show in order for the Court to issue such a writ. “(1) The 7 claim upon which the attachment is based [must be] one upon which an attachment may be issued. 8 (2) The plaintiff [must] establish[] the probable validity of the claim upon which the attachment is 9 based. (3) The attachment [must] not sought for a purpose other than the recovery on the claim upon 10 which the attachment is based. (4) The amount to be secured by the attachment [must be] greater than 11 zero.” Cal. Civ. Proc. Code § 484.90(a). Further, when the request for attachment occurs “in an 12 action for a claim of money which is based upon an express or implied contract[,] . . . the total amount 13 of such claim [must be] a fixed or ‘readily ascertainable’ amount not less than $500.00.” Pos-A- 14 Traction, Inc. v. Kelly-Springfield Tire Co., 112 F. Supp. 2d 1178, 1181–82 (C.D. Cal. 2000) (citing 15 Cal. Civ. Proc. Code § 483.010(a)). 16 This “provisional remedy” is designed “to aid in the collection of a money demand.” Kemp 17 Bros. Constr., Inc. v. Titan Elec. Corp., 53 Cal. Rptr. 3d 673, 674 (Cal. Ct. App. 2007). However, 18 “[a]ttachment is a harsh remedy because it causes the defendant to lose control of his property before 19 the plaintiff’s claim is adjudicated.” Martin v. Aboyan, 196 Cal. Rptr. 266, 269 (Cal. Ct. App. 1983) 20 (citation omitted). Because of this, the statutory requirements are “strictly construed.” Kemp Bros., 21 53 Cal. Rptr. 3d at 674–75; see also Blastrac, N.A. v. Concrete Solutions & Supply, 678 F. Supp. 2d 22 1001, 1004–05 (C.D. Cal. 2010); Pos-A-Traction, 112 F. Supp. 2d at 1181 (“Attachment is a purely 23 statutory remedy, which is subject to strict construction.” (citing Jordan-Lyon Prods., Ltd. v. Cineplex 24 Odeon Corp., 35 Cal. Rptr. 2d 200, 203–04 (Cal. Ct. App. 1994))). Moreover, the Court is required 25 by statute to hold a hearing before issuing a writ. Cal. Civ. Proc. Code § 484.040. 26 // 27 // 28 // -3- 10cv762 1 ANALYSIS 2 As previously stated, there are six distinct elements which Plaintiff must establish in this case 3 prior to the issuance of a writ. They will be addressed in turn below. 4 I. THIS CLAIM IS ONE UPON WHICH A WRIT OF ATTACHMENT MAY ISSUE 5 The first requirement under section 484.90(a) is that the “claim upon which the attachment is 6 based [must be] one upon which an attachment may be issued.” There is no question that Plaintiff’s 7 breach of contract claim is one upon which an attachment may be issued. Attachment based on breach 8 of contract is specifically contemplated by Civil Procedure Code section 483.010(a) (“an attachment 9 may be issued . . . in an action on a claim . . . for money . . . based upon a contract”). Defendants do 10 not dispute this. The Court FINDS this element satisfied. 11 II. THE AMOUNT TO BE SECURED IS GREATER THAN ZERO 12 Next, the Court FINDS that the amount to be secured by the attachment is greater than zero. 13 Cal. Civ. Proc. Code § 484.90(a)(4). The Complaint states that Plaintiff is seeking at least 14 $595,068.20. (See, e.g., Compl. at 8.) This is obviously greater than zero and Defendants, by their 15 silence, concede the point. 16 III. THIS CLAIM IS FOR A ‘READILY ASCERTAINABLE’ AMOUNT NOT LESS THAN FIVE 17 HUNDRED DOLLARS 18 Further, since this is an action for a claim of money which is based upon an express or implied 19 contract, the Plaintiff must also establish that the total amount of his claim is a fixed or readily 20 ascertainable amount not less than $500.00. Cal. Civ. Proc. Code § 483.010(a). The Court FINDS 21 that Plaintiff’s claim is both readily ascertainable and more than five hundred dollars. 22 In CIT Group/Equip. Fin., Inc. v. Super DVD, Inc., 115 Cal. Rptr. 3d 927 (Cal. Ct. App. 2004), 23 the court was confronted with the argument that “the contract in this case does not [present a fixed or 24 readily ascertainable amount] because at the time the contract was executed there were too many 25 uncertainties regarding the amount of damages.” Id. at 929. “‘[I]t is a well-recognized rule of law 26 in this state that an attachment will lie upon a cause of action for damages for a breach of contract 27 where the damages are readily ascertainable by reference to the contract and the basis of the 28 computation of damages appears to be reasonable and definite. The fact that the damages are -4- 10cv762 1 unliquidated is not determinative. But the contract sued on must furnish a standard by which the 2 amount due may be clearly ascertained and there must exist a basis upon which the damages can be 3 determined by proof.’” Id. (quoting Lewis v. Steifel, 220 P.2d 769, 771 (Cal. Ct. App. 1950)). In other 4 words, “it is not necessary that the amount owed appear on the face of the contract.” Id. (citing 5 Bringas v. Sullivan, 273 P.2d 336, 340 (Cal. Ct. App. 1954)). 6 Under this standard, the court found that attachment was proper in that case. Specifically at 7 issue, the parties had entered into a lease “set[ting] forth the rental period and the monthly rent due.” 8 Id. at 930. The court found that this “provided a clear and definite formula for the computation of 9 damages.” Id. 10 However, the CIT court also noted some examples of cases where the contract itself did not 11 specify how much was owed but damages were still sufficiently certain. For example, a writ of 12 attachment issued on a contract requiring payment on a percentage of income and commission basis 13 which had been performed for “nearly two and a half years.” Id. at 929 (citing Walker v. Phillips, 22 14 Cal. Rptr. 727 (Cal. Ct. App. 1962)). Another cited case, “involved an eight-year lease of a coin- 15 operated music machine” where the “defendant agreed to pay plaintiffs 50 percent of all moneys 16 deposited in the machine.” Id. at 929–30 (citing Bringas v. Sullivan, 273 P.2d 336 (Cal. Ct. App. 17 1954)). 18 These cases persuade the Court to find that damages are sufficiently ascertainable here. The 19 agreement between Plaintiff and Defendants states that the amount owed in the second earn out is “[a] 20 cash consideration equivalent to 1.538 times the incremental increase, if any, of Gross Revenue for 21 the 12-month period beginning January 1, 2009 as compared to the Gross Revenue for the 12-month 22 period beginning January 1, 2008.” (Merger Agreement § 1.2(b).) The agreement defined “Gross 23 Revenue” to mean “those revenues realized by the [ConfirmNet] or, as applicable, the Surviving 24 Corporation, from the Business, as determined in accordance with [Generally Accepted Accounting 25 Principles (GAAP)].” (Merger Agreement, App. A at A-4.) Documentation provided by Defendants 26 provides the basis for Plaintiff’s claims and offers a clearly ascertainable figure owed should Plaintiff 27 prevail. 28 Defendants’ invocation of American Manufacturers Mutual Insurance Company v. Carothers -5- 10cv762 1 Construction Inc., 2007 WL 2729849 (E.D. Cal. 2007), is unhelpful. Although that court concluded 2 that attachment was improper, it does not provide any useful analysis. Instead, it simply concluded 3 that the “amount of any damages owed by Defendants to Plaintiffs remains disputed and in flux due 4 to unresolved factual issues as to those damages.” Id. at *1. Without context of what remained in 5 dispute in that case it is impossible to analogize to the present facts. The American Manufacturers 6 court’s observation could be said of any case prior to jury verdict. If that were the controlling 7 standard, a writ of attachment would never issue. 8 Further, there is no basis for Defendants’ assertion at oral argument that a writ of attachment 9 should only issue if it can be calculated using “lawyer math skills.” The statute says that the amount 10 should be “readily ascertainable,” but never says that the underlying computation must be simple. But 11 regardles, the math this case is simple. The contract provides for a very straightforward calculation, 12 requiring nothing more than basic mathematical operations and the underlying information disclosed 13 by Defendants. 14 In light of the above, the Court FINDS that the damages in this case are “a fixed or readily 15 ascertainable amount not less than five hundred dollars.” 16 IV. THE PLAINTIFF’S PURPOSE FOR SEEKING THE WRIT IS FOR RECOVERY ON HIS CLAIM 17 Next, the Court FINDS that Plaintiff has established that his purpose in seeking a writ of 18 attachment is proper. Plaintiff declares that he is “seeking a Writ of Attachment solely to create a 19 judicial lien on Defendants’ assets pending a determination on the merits of this case, and for no other 20 purpose.” (Doc. No. 4-3 (Irving Decl.) ¶ 29.) Defendants argue that this is not true, claiming that “all 21 evidence is to the contrary.” (Opp. at 10–11.) Defendants’ cite their status as a public companies with 22 publicly available financial records and significant available cash to satisfy any legitimate judgment. 23 (Id.) Thus, they reason that there is no “risk that Plaintiff will be unable to recover . . . should he 24 prevail.” (Id. at 11.) Moreover, attachment “will inconvenience Ebix and could have the effect of 25 seriously disrupting Ebix’s ability to conduct business.” (Id.) 26 The Court FINDS Defendants’ arguments highly unpersuasive. They offer no evidence that 27 Plaintiff is acting out of an improper purpose. Being a public company with publicly available 28 financial records is cold comfort should no assets be available to satisfy a future judgment. Moreover, -6- 10cv762 1 the availability of cash now does not mean that assets will be available at the time of a theoretical 2 judgment. Furthermore, that this would inconvenience Ebix does not mean that Plaintiff’s motive is 3 improper. Thus, the Court will rely on the only direct evidence of Plaintiff’s intent before it at present 4 and find that Plaintiff’s purpose in seeking the writ of attachment is not improper. 5 V. THE PROBABLE VALIDITY PLAINTIFF’S CLAIM 6 Having addressed section 483.010(a) and the first, third, and fourth requirements under section 7 484.90(a), the Court turns to the decisive issue, the second factor under section 484.90(a). This 8 requires Plaintiff to “establish[] the probable validity of [his] claim.” Cal. Civ. Proc. Code § 9 484.90(a)(2). 10 “A claim has ‘probable validity’ where it is more likely than not that the plaintiff will obtain 11 a judgment against the defendant on that claim.” Cal. Civ. Proc. Code § 481.190. The Court makes 12 this determination by “consider[ing] the relative merits of the positions of the respective parties and 13 make a determination of the probable outcome of the litigation.” Loeb & Loeb v. Beverly Glen Music, 14 Inc., 212 Cal.Rptr. 830, 837 (Cal. Ct. App. 1985). “[I]t is not enough for the plaintiff to make out a 15 prima facie case for breach of contract; rather, the plaintiff must also show that the defenses raised are 16 ‘less than fifty percent likely to succeed.’” Blastrac, N.A. v. Concrete Solutions & Supply, 678 F. 17 Supp. 2d 1001, 1005 (C.D. Cal. 2010 (citing Pet Food Express, Ltd. v. Royal Canin USA Inc., 2009 18 WL 2252108, at *5 (N.D. Cal. 2009)); see also Intervest Mortgage Inv. Co. v. Skidmore, 2008 WL 19 5385880, at *7 (E.D. Cal. Dec. 19, 2008) (noting that section 484.090 speaks to the outcome of the 20 litigation and not just a prima facie case). 21 “A cause of action for damages for breach of contract is comprised of the following elements: 22 (1) the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and 23 (4) the resulting damages to plaintiff.” Armstrong Petroleum Corp. v. Tri-Valley Oil & Gas Co., 116 24 Cal. App. 4th 1375, 1391 n.6 (2004) (quoting Careau & Co. v. Sec. Pac. Bus. Credit, Inc., 222 Cal. 25 App. 3d 1371, 1399 (1990)). 26 27 28 At the outset, the Court FINDS that Plaintiff has established elements 1 and 2 of his breach of contract claim. Defendants do not contest this conclusion. The primary focus of both parties is whether three deductions from the Second Earn Out were -7- 10cv762 1 improper and in breach of the Merger Agreement. (See Attachment Motion at 12–15; Attachment 2 Opp. at 6–9.) To the extent that Plaintiff is able to demonstrate that the deductions are improper, he 3 will establish elements 3 and 4. Thus, each deduction is discussed below. 4 A. The First Allegedly Improper Deduction 5 The first alleged improper deduction involves $158,333 in revenue from Defendants’ customer 6 Republic Services. (Memo. ISO Motion at 12.) Plaintiff claims that the inclusion of this revenue is 7 supported by an invoice issued by Defendants on October 31, 2009 “which shows on its face that it 8 is the subscription fee for the October through December 2009 fourth quarter.” (Id. (citing Kinslow 9 Decl. ¶ 10 & Kinslow Decl., Ex. J).) He also argues that this conclusion is supported by the fact that 10 the parties “had previously agreed that 2009 Gross Revenue should obviously include $158,333 . . . 11 for revenue earned and received from Republic Services in 2009.” (Id. (citing Kinslow Decl. ¶ 10 & 12 Kinslow Decl., Ex. G).) 13 Defendants assert that “invoice 147020309-1, covered the three month period of December 14 2009, January 2010, and February 2010.” (Opp. at 7.) Since under GAAP Defendants “could not 15 recognize the revenue for service provided to Republic Services in January 2010 and February 2010 16 until such service was rendered and the revenue actually earned,” part of the fee listed in the invoice 17 should not be part of the Second Earn Out. (Id.) 18 Given the evidence presented in this motion, the Court FINDS that Plaintiff HAS NOT 19 established the probable validity of prevailing with respect to the first deduction. This is because 20 income for services performed in 2010 cannot be recognized in 2009. 21 Accrual basis accounting recognizes income “when all the events have occurred that fix the 22 right to receive the income and the amount of the income can be determined with reasonable 23 accuracy.” Treas. Reg. § 1.446-1(ii)(A); see also Staff Accounting Bulletin No. 101, 64 Fed. Reg. 24 68,936 (Dec. 9, 1999). This is true regardless of whether the company is paid before or after it renders 25 the services entitling it to that income. In other words, if a company using accrual basis accounting 26 requires a client to pay before it actually does the contracted-for work, that company may not 27 recognize the money received as income until the work gets done. 28 In this case, there are five invoices before the Court. The invoice upon which Plaintiff heavily -8- 10cv762 1 relies states that it is the “4th Installment” and covers the time period from “October–December 2 2009.” (Kinslow Decl., Ex. J.) A second, repeatedly cited by Defendants, also states that it is the “4th 3 Installment,” but notes the time period as “Dec 09–Feb 10.” (Irving Decl., Ex. D at EXD_0121.) 4 Three other invoices are also before the Court, covering installments 1, 2, and 3. (See id. at 5 EXD_0115, EXD_0117, & EXD_0119.) None of those invoices directly states to what time period 6 it applies, but instead list the contract period of “March 2009 – February 2010.” (Id.) 7 The Court finds that, given this evidence, Plaintiff has not established the probable validity of 8 the impropriety of this deduction. It is undisputed that the contract at issue covered the months of 9 March 2009 through February 2010. As such, five sixths of the work on the contract occurred in 2009 10 so, absent proof otherwise, the Court must conclude that only five sixths of the contractual payments 11 can be properly recognized as income in 2009. 12 As to Plaintiff’s argument that Defendants have not shown that this deduction is proper, it must 13 fail. The statute makes clear that it is Plaintiff’s burden to establish the probable validity of his claim. 14 In this case, it is Plaintiff’s evidence which defeats the probable validity of the claim. Moreover, the 15 events leading up to this lawsuit where Defendants allegedly agreed to Plaintiff’s position and then 16 changed their mind don’t alter this conclusion because the revenue still cannot be recognized until it 17 is earned. To reiterate, the Court FINDS that Plaintiff HAS NOT established a probable validity of 18 success on the first allegedly improper deduction, nor, consequently, a probable validity regarding the 19 interest allegedly owed thereon. The Second Allegedly Improper Deduction 20 B. 21 According to Plaintiff, the second improper deduction was asserted as “an ‘adjustment due to 22 an ‘Overstatement of 2008 Revenues from 1st Earn Out Payment’” in the amount of $213,393. 23 (Memo. ISO Motion at 13.) Plaintiff argues that the parties “entered into a binding letter of 24 agreement” which provided that “‘[f]or purposes of the Second Earn Out . . . the 2008 Gross Revenues 25 were $5,120,210.’” (Id. (quoting Irving Decl., Ex. E (“First Earn Out Settlement”) at EXE_0125) 26 (emphasis omitted).) 27 Defendants believe that “Ebix and Plaintiff disagreed on the amount owed on the First Earn 28 Out, and Ebix retained an independent auditor to determine the amount actually owed to Plaintiff, as -9- 10cv762 1 required by section 1.2(b)(vi) of the [Merger] Agreement.” (Opp. at 7 (citing Merger Agreement § 2 1.2(b)(vi) and Kerris Decl. ¶ 13).) Since the audit “was a time consuming process,” it was not until 3 after the agreement that “Ebix concluded that the preliminary payment of the First Earn Out 4 Contingent Consideration was overstated by $213,393.” (Id. at 7–8.) Further, Defendants argue that 5 “Plaintiff acknowledged the overstatement in a letter dated June 8, 2010.” (Id. at 8 (citing Kerris 6 Decl., Ex. E).) 7 The Court FINDS that Plaintiff’s claim for breach of contract on the second improper 8 deduction has probable validity. This claim is fairly simple and Defendants’ contrary arguments fail 9 to address the fundamental dispositive factor. That is, Plaintiff has provided the Court with a 10 document signed by both Plaintiff and Defendant’s Chief Financial Officer which agrees that “‘[f]or 11 purposes of the Second Earn Out . . . the 2008 Gross Revenues were $5,120,210.’” (First Earn Out 12 Settlement at EXE_0125.) Moreover, the parties agreed to a specific First Earn Out payment in 13 settlement of Plaintiff’s claims. 14 As to Defendants’ claim that Plaintiff “acknowledged the overstatement,” the Court is 15 unpersuaded. The alleged “acknowledgment” occurred in a letter dated June 8, 2009. (Kerris Decl., 16 Ex. E.) That letter recognizes and vociferously disputes Defendants’ position regarding the gross 17 revenue figure for 2008. (See id. at 27–29.) To call this an “acknowledg[ment of] the overstatement” 18 is misleading. The letter is better characterized as a claim that Defendants were understating the 2008 19 gross revenue figure. Regardless, this letter is irrelevant because it predates the June 30, 2009 20 settlement in which the parties agreed to both the remainder of the First Earn Out payment and the 21 gross revenue figure for 2008. (First Earn Out Settlement at EXE_0125.) 22 Further, to the extent Defendants retained an independent auditor, it was not in conformance 23 with the procedures set forth in the Merger Agreement. The Agreement specifically provides: “If the 24 Parties are unable to agree upon the amount of . . . Consideration due hereunder, the Parties shall . . 25 . cause an independent accountant reasonably satisfactory to the Parent and the Shareholders’ 26 Representative . . . to review the disputed item(s) and amount(s).” (Merger Agreement § 1.2(b)(vi).) 27 First, the Parties clearly were able “to agree upon the amount of . . . Consideration due” making this 28 provision inapplicable. Plaintiff presents a signed agreement accepting a certain amount of - 10 - 10cv762 1 consideration for the First Earn Out. (First Earn Out Settlement at EXE_0125–EXE_0126.) Second, 2 the Kerris Declaration makes clear that the retention of the independent auditor was unilateral. (Kerris 3 Decl. ¶ 13 (“Ebix retained an independent auditor to resolve discrepancies and determine the amount 4 actually owed to Plaintiff.”).) There is no evidence Plaintiff found this auditor “reasonably 5 satisfactory.” Given these two flaws, Defendants cannot hide behind the “independent auditor” 6 provision of the Merger Agreement. 7 For Defendants to now effectively attempt to renege on that agreement by claiming that the 8 agreed-upon figures were overstated would make the agreement settling the First Earn Out disputes 9 a nullity. Defendants have given the Court no good reason to allow that to happen. In light of this, 10 the Court FINDS that Plaintiff has established the probable validity of the second improper deduction 11 allegation in his breach of contract claim and the accompanying interest. 12 C. The Third Allegedly Improper Deduction 13 Plaintiff’s third deduction issue centers around certain receivables Defendants acquired with 14 ConfirmNet “that were allegedly written off in 2009.” (Memo. ISO Motion at 13.) Plaintiff first 15 argues that “the Merger Agreement does not assure Defendants collectability of 100% of the 16 ConfirmNet accounts receivable.” (Id. at 14.) Thus, Plaintiff believes that “Defendants cannot assert 17 a claim” regarding these receivables. 18 documentation contradicts their claims” because they “do not consider the . . . accounts receivable to 19 be uncollectable.” (Id.) According to Plaintiff, “Defendants did not write-off any of these accounts 20 receivable in 2009, as about one-third of these accounts receivable have in fact been collected, and 21 collection efforts just began in January 2010 in regard to the other two-thirds of the accounts 22 recievable.” (Id.) Third, Plaintiff argues “that these delinquent accounts receivable were not written 23 off in 2009[] and [Plaintiff] . . . believes that they have not been written off yet.” (Id.) He comes to 24 this conclusion because “Defendants have provided no documentation . . . showing these amounts 25 were actually written off.” (Id.) Next, “these accounts receivable are collectable [because] . . . Mr. 26 Kerris[, Ebix’s Chief Financial Officer,] admits many of them were collected prior to the issuance of 27 Defendants’ Contingent Gross Revenue Certificate for the Second Earn Out.” (Reply at 7.) Beyond 28 that, Plaintiff believes that “Defendants [have] not establish[ed] why they would have written off (Id.) Second, Plaintiff argues that “Defendants’ own - 11 - 10cv762 1 accounts receivable that they previously realized as revenue and are, in fact, still collecting.” (Id.) 2 Finally, Plaintiff believes that if Defendants want to write off these accounts receivable, they are 3 required by their “financial statement for the year ended December 31, 2009, filed March 16, 2010" 4 to “writ[e] off [the accounts] as bad debt expense” rather than a reduction in revenue. (Id. (emphasis 5 in original).) 6 Defendants counter by arguing that this reduction is proper. (Opp. at 8.) They claim that 7 “revenue from accounts receivable can only be recognized to the extent that the underlying accounts 8 receivable are actually collectible.” (Id.) Moreover, Defendants argue that to include these 9 uncollected accounts receivable “would be in violation of GAAP.” (Id.) 10 The Court finds that Plaintiff has established the probable validity of his claim with respect 11 to the third challenged deduction. The Merger Agreement provides that the amount of the Second 12 Earn Out is 1.538 times the incremental increase in gross revenue1 from 2008 to 2009. The Agreement 13 defines “gross revenue” as “those revenues realized by the Company or, as applicable, the Surviving 14 Corporation, from the Business, as determined in accordance with GAAP.” (Merger Agreement, 15 App’x A at EXA_0062.) Providing more specificity, International Accounting Standard 18 defines 16 Revenue as “the gross inflow of economic benefits during the period arising in the course of the 17 ordinary activity of an entity when those inflows result in increases in equity, other than increases 18 relating to contributions from equity participants.” 19 Given this definition, it is probable that the bad debt write-offs are improper. These 20 receivables were related to income recognized before the merger occurred. Defendants’ inability to 21 collect on these accounts has no effect on “the gross inflow of economic benefits” (or the “revenues 22 realized”) during 2009. Rather, as stated in Defendant’s financial statement, receivables written off 23 are expenses which do not affect a company’s yearly gross revenue.2 Of course these write offs would 24 effect the company’s bottom line net income. However, the Second Earn Out is not calculated based 25 on net income, making expenses incurred, such as these write-offs, irrelevant to the calculation of the 26 1 27 28 Although the Merger Agreement excludes certain revenue from its calculations, there is no evidence that the receivables at issue fall within the stated exclusions. 2 This is also the standard practice for uncollectible receivables pursuant to GAAP. See Statement of Financial Accounting Standards No. 5. - 12 - 10cv762 1 Second Earn Out. 2 Even ignoring the fact that the collectability of these receivables is totally unrelated to 2009 3 gross revenue, Defendants’ arguments here make little sense. Their brief talks about recognizing 4 “revenue from accounts receivable,” but the recognition of revenue and the company’s ability to 5 collect the cash owed by their customer are not generally connected. As discussed above, revenue is 6 earned “when all the events have occurred that fix the right to receive the income and the amount of 7 the income can be determined with reasonable accuracy.” Treas. Reg. § 1.446-1(ii)(A). Defendants 8 do not dispute their right to receive the income, only their ability to collect that income. Thus, even 9 if the right to the revenue had arisen in 2009, it would still be improper to reduce gross revenue simply 10 because the receivables were uncollectable. Interest Owed 11 D. 12 Finally, Plaintiff argues that Defendants are also liable for interest on the late “partial payment 13 . . . of $2,975,386.” (Memo. ISO Motion at 15.) Plaintiff is correct. California Civil Code § 3289 14 states that where a contract “does not stipulate a legal rate of interest, the obligation shall bear interest 15 at a rate of 10 percent per annum after a breach.” 16 In this case, the Merger Agreement states an interest rate with regard to “underpa[yments]”; 17 they are to be paid “at a rate of eight percent (8%) per annum,” using a simple interest calculation. 18 (Merger Agreement § 1.2(b)(vi).) The agreement does not, however, state what rate of interest would 19 apply to a late initial payment. 20 So the Court applies the rate set out by section 3289 to Defendant’s initial payment. That 21 payment was due on January 30, 2010 and the partial payment was made on March 26, 2010. As such, 22 55 days passed between the date the payment was due and the date the payment was made. At ten 23 percent simple interest per annum, Plaintiff has a established a probable validity that Defendant owes 24 an additional $44,834.58 ($2,975,386.00 * 10% * (55 days/365 days)). 25 Plaintiff suggests that the actual amount owed is $53,110.20. That number appears to be 26 calculated to include the alleged improper deductions. However, Plaintiff has only shown probable 27 validity on two of the three deductions. Moreover, the eight percent interest rate applies to any 28 disputed items on which Plaintiff prevails in front of the independent accountant. (Id.) Therefore, - 13 - 10cv762 1 Plaintiff’s claim has probable validity with respect to an additional $3,684.83 ($305,673.00 * 8% * 2 (55 days/365 days)). 3 In sum, Plaintiff has a probable validity that Defendant owes $48,519.41. However, at oral 4 argument, Plaintiff and Defendant informed the Court that Defendant tendered $35,000.00 to cover 5 the interest which Defendant believes that it owes. As such, the Court reduces the amount of interest 6 to $13,519.41. 7 8 CONCLUSION For the reasons stated, the Court GRANTS IN PART AND DENIES IN PART Plaintiff’s 9 motion. The motion is GRANTED as to the second and third alleged improper deductions, 10 DENIED as to the first improper deduction, and GRANTED IN PART AND DENIED IN 11 PART with respect to interest owed. Therefore, the Court hereby ISSUES a writ of attachment in 12 the amount of $319,192.41 ($213,393.00 + $92,280 + $13,519.41). 13 IT IS SO ORDERED. 14 15 16 17 DATED: August 10, 2010 Honorable Janis L. Sammartino United States District Judge 18 19 20 21 22 23 24 25 26 27 28 - 14 - 10cv762
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