Kelly Capital, LLC v. S&M Brands, Incorporated

UNPUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 12-1819

KELLY CAPITAL, LLC; KELLY ESCROW FUND V, LLC,

Plaintiffs - Appellants,

v.

S&M BRANDS, INCORPORATED,

Defendant – Appellee,

v.

SEI PRIVATE TRUST COMPANY, as Trustee of the SEI Private
Trust,

Third Party Defendant - Appellant.

Appeal from the United States District Court for the Eastern
District of Virginia, at Richmond. Robert E. Payne, Senior
District Judge. (3:10-cv-00728-REP)

Argued: May 14, 2013 Decided: July 15, 2013

Before NIEMEYER, MOTZ, and FLOYD, Circuit Judges.

Affirmed by unpublished per curiam opinion.

ARGUED: David Barmak, MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND
POPEO, P.C., Washington, D.C., for Appellants. Bryan Michael
Haynes, TROUTMAN SANDERS LLP, Richmond, Virginia, for Appellee.
ON BRIEF: Andrew Nathanson, Bridget Moorhead, Matthew Cohen,
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C., Washington,
D.C., for Appellants. Alan D. Wingfield, Timothy J. St. George,
TROUTMAN SANDERS LLP, Richmond, Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.

2
PER CURIAM:

I.

In 1998, the Attorneys General of forty-six states entered

into a Master Settlement Agreement (MSA) with four major tobacco

companies to resolve class actions that certain states had

initiated against the manufacturers. See Grand River Enter. Six

Nations, Ltd. v. Pryor, 481 F.3d 60, 63 (2d Cir. 2007) (per

curiam). Later, to broaden the reach of the MSA, states adopted

legislation, commonly known as Tobacco Escrow Statutes,

requiring all tobacco manufacturers either to (1) join the MSA

or (2) make annual contributions to escrow accounts for the

purpose of paying tobacco-related claims. VIBO Corp. v. Conway,

669 F.3d 675, 681 (6th Cir. 2012). In this case, we deal with a

Virginia-based tobacco manufacturer, Appellee S & M Brands, Inc.

(S & M), and the contributions it made to escrow accounts.

Specifically, we consider the terms of a contract through which

it sold certain interests in those contributions.

A.

Virginia law mandates that escrow contributions remain in

escrow for twenty-five years and be used only to pay judgments

or settlements on tobacco-related claims. Va. Code Ann. § 3.2-

4201(B). Unused principal that remains in an account after

twenty-five years reverts back to the manufacturer that placed

3
it in escrow. Id. Although manufacturers may invest the funds

and pocket any income generated from such investments, they may

not sell or transfer the fund principal. Id. Importantly,

however, they may sell their interest in the income earned on

fund investments and their reversionary interest in the

principal. See id. Here, we term the interest in the

investment income plus the reversionary interest an “escrow

release.”

For tax purposes, S & M’s escrow accounts are classified as

Qualified Settlement Funds (QSF). A QSF has two primary

characteristics: (1) it is established via court order to

“resolve or satisfy,” inter alia, claims “[a]rising out of a

tort, breach of contract, or violation of law,” and (2) it

operates as a trust such that “its assets are . . . segregated

from other assets of the transferor.” 26 C.F.R. § 1.468B-1(c).

Additionally, in the eyes of the Internal Revenue Service (IRS),

a QSF is a person. Id. § 1.468B-2(a). Thus, its modified gross

income, such as the income generated by investment of escrowed

funds, is taxed. Id. The impact of this policy is significant

because it effectively subjects the income earned on investments

of escrowed funds to a double layer of taxation—not only does

the owner of the income pay taxes on what is earned, but the

QSF, as a person created via regulation, does as well.

Moreover, because use of the QSF principal is limited to

4
satisfaction of tobacco-related claims, the taxes must be paid

from the repository of income earned. It goes without saying

that these tax regulations somewhat inhibit the sale of escrow

releases associated with QSF-classified accounts.

B.

In 2009, S & M began negotiating with Appellant Kelly

Capital, LLC, a private equity firm based in California, to sell

its escrow releases. From the outset, S & M communicated that

the escrow accounts’ QSF status subjected their income to a

double layer of taxation, and Kelly Capital pursued various

routes to avoid the double tax. Most notably, it posited that

because S & M would pay taxes on its income from the
sale of its escrow releases and because Kelly would
thereafter own all ‘income’ generated by the escrowed
funds, the QSF-status of the funds (and hence the QSF-
level taxes) would be eliminated upon the completion
of its transaction with S & M.

Kelly Capital, LLC v. S & M Brands, Inc., 873 F. Supp. 2d 659,

666 (E.D. Va. 2012). The idea was novel, but it gained little

traction. Indeed, early in the negotiation process, Kelly’s

lawyers advised it of the theory’s deficiency: “[S]ince the

ownership of the account is still in the name of S & M Brands,

and the QSF is a separate tax entity, the QSF should [continue

to] pay taxes on earnings and transfer the remainder to Kelly

5
Capital.” Id. (alterations in original) (internal quotation

marks omitted).

1.

On January 21, 2010, S & M provided the first draft of an

Escrow Release Transfer Agreement (ERTA) to Kelly Capital.

Relevant here, section 5.02(a) required Kelly to “pay all

applicable federal and state taxes, if any, required to be paid

by the Purchaser with respect to the Assigned Escrow Releases,

including the taxes for a Qualified Settlement Fund under the

Internal Revenue Code.”

On March 5, 2010, Kelly responded with a revised ERTA in

which the phrase, “including the taxes for a Qualified

Settlement Fund under the Internal Revenue Code” had been

stricken from section 5.02(a), and an additional paragraph,

section 5.01(m), had been added. Section 5.01(m) required S & M

to “pay all applicable federal and state taxes, if any, required

to be paid by the Seller and the Qualified Settlement Funds,

including any taxes owed with respect to the Assigned Escrow

Releases prior to their receipt by the Purchaser.” It also

provided that S & M would

indemnify the Purchaser and its Assignees for any loss
of Assigned Escrow Releases or Related Escrow Funds
proximately caused by the Seller’s or the Qualified
Settlement Funds’ failure to pay such liability and
breach of this Section 5.01(m) [and that S & M Brands

6
 would] promptly pay all reasonable legal and other
directly related expenses incurred by the Purchaser or
its Assignees in connection with any such dispute.

S & M responded on March 18, 2010, with a draft that rejected

Kelly’s amendments and provided instead that as to the QSF-level

taxes, S & M would pay only those taxes that had “accrued on or

prior to the Closing Date.” It further agreed to indemnify

Kelly with respect to any legal action taken in the event that

S & M failed to pay such pre-closing taxes. Kelly accepted

these revisions and sent an amended ERTA to S & M. The amended

ERTA included the following addition to section 5.01(m):

In the event that the Internal Revenue Service or any
state taxing authority makes any claim that the Seller
or the Qualified Settlement Funds owe any federal or
state tax liability (including any penalties or fines)
with respect to the Assigned Escrow Releases or
Related Escrow Funds accrued after the Closing Date,
the Seller shall use its best efforts to cooperate
with the Purchaser or its Assignee to defend such
claim . . . . The Seller shall promptly pay all
reasonable legal and other directly related expenses
incurred by the Purchaser or its Assignees in
connection with any such dispute as invoiced by the
Purchaser or its Assignee to the Seller.

S & M rejected this addition, responding with a version that

reversed the obligations of the section 5.01(m) language that

Kelly had proffered. The new version replaced the last sentence

of Kelly’s proposed addition with a sentence requiring that “the

Purchaser or its Assignee . . . promptly pay all reasonable

legal and other directly related expenses incurred by the Seller

as invoiced by the Seller to the Purchaser or its Assignee.”

7
 2.

The parties eventually finalized the deal in April 2010

with an ERTA that gave Kelly Capital or its assignees the right

to purchase certain releases for thirty-four cents per dollar of

principal. Relevant here, the final ERTA included the following

definitions:

“Escrow Release(s)” means all right, title and
interest in and to and all rights under the Escrow
Agreement and the Tobacco Escrow Statutes with respect
to (i) release of Escrowed Funds on or after twenty-
five (25) years after the original deposit of each of
such Escrowed Funds, (ii) interest or other
appreciation earned on such Escrowed Funds, (iii)
refund due to overpayment into such Escrowed Funds,
and (iv) other release of all or any portion of such
Escrowed Funds . . . or any earnings with respect
thereto or any securities or instruments in which such
Escrowed Funds are invested, together with each of the
following rights which are essential for the
protection and enjoyment of the foregoing: (1) the
right to co-control the defense against any claims,
allegations or proceedings that could result in the
forfeiture, disgorgement or release of the Escrowed
Funds, in whole or in part, and (b) the right to give
instructions to the Escrow Agent with respect to the
investment of the Escrowed Funds (provided that such
investments are consistent with the Tobacco Escrow
Statutes, Escrow Rules and Regulations and the Escrow
Agreement) and any release of the Escrowed Funds only
as described in (i) through (iv) above.

. . . .

“Qualified Settlement Fund” shall have the meaning set
forth in the applicable Tobacco Escrow Statutes.

“Qualified Settlement Funds” means the Qualified
Escrow Funds (comprised of the Escrowed Funds
(including the Related Escrow Funds)) each as
classified for tax reporting purposes as a qualified
settlement fund by the Internal Revenue Service

8
 pursuant to a Private Letter Ruling dated January 11,
2007.

The ERTA’s relevant provisions read,

Section 2.01. Purchase and Conveyance.

(a) Conveyance of Escrow Releases. The Seller
does hereby agree to sell, transfer, assign, set over
and otherwise convey to the Purchaser . . . , without
recourse, all its right, title and interest in, to and
under each and every Escrow Release with respect to
the related Escrowed Funds described on Schedule B to
this Agreement and all amounts received with respect
thereto and all proceeds thereof from and after the
Closing Date . . . .

(b) Compliance with Tobacco Escrow Statutes;
Escrow Agreement. The Seller and the Purchaser hereby
acknowledge and agree that notwithstanding anything
contained herein to the contrary, the Related Escrowed
Funds shall remain deposited with the applicable
Escrow Agent . . . in the name of the Seller and be
available to satisfy Released Claims in accordance
with the terms and conditions of the applicable Escrow
Agreement and the Tobacco Escrow Statutes.

(c) Ownership. As of the Closing Date . . . the
Purchaser shall become the legal and equitable owner
of the Assigned Escrow Releases, and shall be entitled
to all of the rights, privileges, duties and remedies
applicable to said ownership. . . .

. . . .

Section 3.03. Related Documents. Concurrently
herewith and as a condition for closing the
transaction, the parties shall execute and deliver the
Indemnity Agreement and Acknowledgement Agreement.

. . . .

Section 5.01. . . .

. . . .

9
 (m) Qualified Settlement Funds. The Seller
shall pay all applicable federal and state taxes, if
any, required to be paid by the Seller and the
Qualified Settlement Funds accrued on or prior to the
Closing Date with respect to the Escrowed Funds. . . .
In the event that a final determination, judgment or
settlement of any dispute between the Internal Revenue
Service, any state taxing authority, the Seller and/or
the Qualified Settlement Funds and the Purchaser, if
applicable, with respect to any federal or state tax
liability (including any penalties or fines) owed by
the Seller and/or the Qualified Settlement Funds
accrued on or prior to the Closing Date, the Seller
shall indemnify the Purchaser and its Assignees for
any loss of Assigned Escrow Releases or Related Escrow
Funds proximately caused bye the Seller’s or the
Qualified Settlement Funds’ failure to pay such
liability and breach of this Section 5.01(m). In
addition, the Seller shall also promptly pay all
reasonable legal and other directly related expenses
incurred by the Purchaser or its Assignees in
connection with any such dispute as invoiced by the
Purchaser or its Assignees to the Seller. . . . The
Seller shall use its best efforts to cause the Escrow
Agent to annually deliver to the Purchaser or its
Assignee a Form 1099–INT with respect to the Assigned
Escrow Releases. In the event that the Internal
Revenue Service or any state taxing authority makes
any claim that the Seller or the Qualified Settlement
Funds owe any federal or state tax liability
(including any penalties or fines) with respect to the
Assigned Escrow Releases or Related Escrow Funds
accrued after the Closing Date, the Seller shall use
its best efforts to cooperate with the Purchaser or
its Assignee to defend such claim, subject to Section
5.01(e). For such disputes, the Purchaser or its
Assignee shall promptly pay all reasonable legal and
directly related expenses incurred by the Seller as
invoiced by the Seller to the Purchaser or its
Assignee.

. . . .

Section 5.02. . . .

(a) Taxes and Fees. The Purchaser shall pay all
applicable federal and state taxes, if any, required

10
 to be paid by the Purchaser with respect to the
Assigned Escrow Releases or Related Escrow Funds
received by it. The Purchaser shall pay all fees and
expenses of the Escrow Agent related to the
maintenance of the Related Escrowed Funds.

. . . .

Section 8.12. Schedules, Annexes and Exhibits. The
schedules, annexes and exhibits attached hereto and
referred to herein, as the same may be supplemented
and amended from time to time as contemplated herein,
shall constitute a part of this Agreement and are
incorporated into this Agreement for all purposes.

In addition, the ERTA provided options to purchase escrow

releases in the future, subject to certain timing requirements.

Finally, as noted above, section 2.01(b) requires that the

Purchaser of the escrow releases comply with “the applicable

Escrow Agreement and the Tobacco Escrow Statutes.” Relevant

here, the Escrow Agreement includes a provision that requires

the Escrow Agent to “comply with all applicable tax filing,

payment and reporting requirements, including, without

limitation, those imposed under Treas. Reg.

[section] 1.468B . . . .” As we already observed, Treasury

Regulation section 1.468B stipulates that a QSF is a person

subject to a tax on its modified gross income. 26 C.F.R.

§ 1.468B-2(a).

11
 3.

Following the ERTA’s execution, Kelly Capital assigned a

portion of its immediate purchasing rights to Appellant SEI

Private Trust Company (SEI), which purchased $30 million of

escrow releases for $10.2 million. SEI is the “directed

trustee” of a pension fund, and its purchases of the releases

were directed by its Investment Committee, comprised only of

Michael Kelly, the Chief Executive Officer of Kelly Capital, and

Nick Spriggs, the former President of Kelly Capital. Kelly

Capital assigned the remainder of its immediate purchasing

rights to Appellant Kelly Escrow Fund V, LLC (Kelly Escrow), a

special purpose vehicle that Kelly Capital had formed to

purchase escrow releases. Kelly Escrow purchased $40 million of

escrow releases for $13.6 million.

Soon thereafter, problems arose. “Kelly Capital sought to

put together a securitization of the escrow release[s] already

purchased by [Kelly Escrow] and SEI to sell interest in the

package of escrow release[s] to third party purchasers.” But

Kelly Capital’s investment bankers communicated that “the

prospectus for the transaction would have to make a clear

disclosure regarding the payment of the QSF taxes on the

purchased escrow releases.” As a result, the securitization did

not move forward. Of course, such struggles motivated Kelly to

continue researching options for avoiding the QSF-level taxes,

12
and it did just that, asking two different law firms to research

the issue. Ultimately, however, these efforts proved

unavailing.

On September 9, 2010, Kelly Capital “took the position that

it was not liable for the QSF[] taxes” and communicated its view

to S & M. S & M disagreed, maintaining that Kelly had “assumed

the risk of the QSF-level taxation in the ERTA.” On September

13, 2010, Kelly Capital sought to extend its option to purchase

additional releases; thus, it sent S & M a notice to that

effect. S & M communicated that it would not extend the option

period unless Kelly Capital provided assurance in writing that

it would pay the QSF-level taxes. Kelly Capital responded by

instituting this action, together with Kelly Escrow. The

complaint asked the district court to, inter alia, (1)

“[d]eclar[e] that [it] ha[d] not assumed in the ERTA or the

amendments to the ERTA liability or responsibility for paying

the QSF-related taxes, and that such liability was not

transferred by S & M under the ERTA, as amended, or otherwise”;

(2) “[o]rder[] S & M to specifically perform the ERTA . . . by

selling to Kelly [Escrow] the additional income and remainder

interests as to which it ha[d] indicated its intention to

purchase”; (3) “preserv[e] Kelly [Escrow’s] options to purchase

additional income and remainder interests in the future in

accordance with the ERTA”; and (4) “enjoin[] S & M from selling

13
the additional interests to another buyer without first allowing

Kelly [Escrow] to do so in accordance with the ERTA . . . .”

S & M responded with counterclaims against Kelly Capital

and Kelly Escrow, also naming SEI as a defendant to these

claims. S & M sought, inter alia,

a declaratory judgment that Kelly Capital’s . . .
interpretation of the ERTA, the Escrow Agreement and
associated documents [was] incorrect, that Kelly
Capital . . . [was] obligated to pay, or to allow to
be paid, all federal and state income taxes on the
assigned Escrow Release(s), and that S & M Brands
ha[d] no obligation to pay such taxes; [and]

a declaratory judgment that it [was] not in default
under the ERTA, the Escrow Agreement[,] and associated
documents, and that Kelly Capital . . . committed a
material anticipatory breach of its ERTA, the Escrow
Agreement and associated documents, thereby releasing
S & M Brands from any remaining obligations under the
ERTA, including as to the transfer of additional
Escrow Release(s) pursuant to the Option.

The parties conducted discovery and filed cross-motions for

summary judgment. The district court denied the motions and, in

so doing, concluded that the ERTA was ambiguous. Therefore,

during a three-day bench trial, the court consulted parol

evidence and determined that Kelly Capital had obligated itself

to pay the QSF-level taxes. The court also concluded that when

Kelly Capital communicated to S & M that it “was not liable for

the QSF[] taxes,” it committed a material anticipatory breach.

Accordingly, the court released S & M from “all further

obligation[] . . . to transfer additional escrow releases

14
pursuant to the option provision of the [ERTA].” Kelly Capital,

873 F. Supp. 2d at 680.

Kelly Capital, Kelly Escrow, and SEI (collectively, “Kelly

Capital” or “Kelly”) appeal the district court’s order,

contending that it erred in concluding that Kelly Capital (1)

obligated itself to pay the post-closing QSF-level taxes and (2)

anticipatorily breached the ERTA. For the reasons that follow,

we affirm the district court’s decision.

II.

Per the terms of the ERTA, New York law applies in this

case. Under New York law, “whether or not a writing is

ambiguous is a question of law to be resolved by the court,”

W.W.W. Assocs., Inc. v. Giancontieri, 566 N.E.2d 639, 642 (N.Y.

1990).

“A contract is unambiguous if the language it uses has ‘a

definite and precise meaning, unattended by danger of

misconception in the purport of the [agreement] itself, and

concerning which there is no reasonable basis for a difference

of opinion.’” Greenfield v. Philles Records, Inc., 780 N.E.2d

166, 170–71 (N.Y. 2002) (alteration in original) (quoting Breed

v. Ins. Co. of N. Am., 385 N.E.2d 1280, 1282 (N.Y. 1978)). Said

differently, “If the agreement on its face is reasonably

susceptible of only one meaning, a court is not free to alter

15
the contract to reflect its personal notions of fairness and

equity.” Id. at 171; cf. US Oncology, Inc. v. Wilmington Trust

FSB, 958 N.Y.S.2d 47, 48 (N.Y. App. Div. 2013) (“A contract is

ambiguous when ‘on its face [it] is reasonably susceptible of

more than one interpretation’” (alteration in original) (quoting

Chimart Assoc. v. Paul, 489 N.E.2d 231, 233 (N.Y. 1986))).

Furthermore, “[e]xtrinsic evidence of the parties’ intent may be

considered only if the agreement is ambiguous.” Greenfield, 780

N.E.2d at 170.

Both parties assert that the ERTA unambiguously supports

their respective positions. Kelly maintains that the ERTA

reflects no “affirmative assumption” on its part of a duty to

pay the QSF-level taxes. S & M counters by citing portions of

the ERTA that in its view “make[] clear . . . that Kelly assumed

the burden of all QSF-level taxes after closing.” We agree with

S & M.

A.

As is evident from our recounting above, the

correspondence, ERTA drafts, and other documentation associated

with negotiation of the final contract is extensive. Even a

cursory review reveals that much wrangling occurred regarding

which party would pay the post-closing QSF-level taxes. Thus,

it is somewhat surprising that, as the district court

16
recognized, “[N]owhere in any of the[] [ERTA] provisions does

either party agree expressly to pay the QSF-level taxes.” Kelly

Capital, LLC, 873 F. Supp. 2d at 671. Such absence tempts us to

immediately rule the ERTA ambiguous as to this issue and resort

to parol evidence. But our initial focus in determining

ambiguity must concern the contractual language that exists, not

the language that is absent. And if the language is “reasonably

susceptible of only one meaning,” we must accord it such

meaning. See W.W.W. Assocs., Inc., 566 N.E.2d at 642

(“[E]xtrinsic and parol evidence is not admissible to create an

ambiguity in a written agreement which is . . . unambiguous upon

its face.” (quoting Intercontinental Planning v. Daystrom, Inc.,

248 N.E.2d 576, 580 (N.Y. 1969)) (internal quotation marks

omitted)). Thus, despite the ERTA’s failure to assign

responsibility for the QSF-level taxes by actually using the

term “Qualified Settlement Fund” in that context, we believe

that it unambiguously places the responsibility for payment of

these taxes with Kelly Capital.

According to section 2.01(c), when Kelly Capital signed the

ERTA, it “bec[a]me the legal and equitable owner of the Assigned

Escrow Releases” and, as such, became “entitled to all of the

rights, privileges, duties and remedies applicable to said

ownership.” One duty, as outlined in section 2.01(b), is

compliance with the “terms and conditions of the applicable

17
Escrow Agreement.” And the Escrow Agreement requires the Escrow

Agent to “comply with all applicable tax filing, payment and

reporting requirements, including, without limitation, those

imposed under Treas. Reg. [section] 1.468B.” It seems to us

that as to the issue here, these sections are “reasonably

susceptible of only one meaning”—namely, that purchasing the

escrow releases includes an assumption of the duty to pay the

QSF-level taxes—i.e., the taxes “imposed under Treas. Reg.

[section] 1.468B.” But if these sections leave doubt as to such

a conclusion, sections 5.01(m) and 5.02(a) provide

clarification.

Section 5.01(m) states, “The Seller shall pay all

applicable federal and state taxes, if any, required to be paid

by the Seller and the Qualified Settlement Funds accrued on or

prior to the Closing Date with respect to the Escrowed Funds.”

Thus, it implies that S & M will not pay the required taxes

after closing and begs the question of which party will.

Section 5.02(a) answers that question: “The Purchaser shall pay

all applicable federal and state taxes, if any, required to be

paid by the Purchaser with respect to the Assigned Escrow

Releases or Related Escrow Funds received by it.” It is true

that section 5.02(a) omits the term “Qualified Settlement Funds”

while section 5.01(m) includes it. Although we find this

curious, we do not think that it renders the contract ambiguous

18
as to the payment of the QSF-level taxes. Section 5.02(a) makes

clear that the purchaser must pay all required “applicable

federal and state taxes,” and as stated earlier, the Escrow

Agreement, with which the purchaser must comply, requires

payment of taxes “imposed under Treas. Reg. [section] 1.46B.”

In short, although we recognize that the contract does not

assign responsibility for the QSF-level taxes by explicit use of

the term, we do not think that read as a whole it is susceptible

to more than one meaning on this point.

B.

In spite of our conclusion that the ERTA unambiguously

assigns responsibility for the QSF-level taxes to Kelly Capital,

we note for the sake of argument that even if we were to find

the contract ambiguous, Kelly would fare no better. “When a

term or clause is ambiguous, ‘the parties may submit extrinsic

evidence as an aid in construction, and the resolution of the

ambiguity is for the trier of fact.’” Geothermal Energy Corp.

v. Caithness Corp., 825 N.Y.S.2d 485, 489 (N.Y. App. Div. 2006)

(quoting Pellot v. Pellot, 759 N.Y.S.2d 494, 497 (N.Y. App. Div.

2003)). Here, the extrinsic evidence indicates the parties’

intent that Kelly assume the QSF-level tax obligations upon

closing.

19
 From the beginning of the negotiations, Kelly understood

that it would be responsible for the QSF-level taxes. Indeed,

the record indicates that S & M communicated that fact early in

the process, such that Kelly was compelled to seek legal advice

regarding avoidance options. Furthermore, section 5.01(m) of

the ERTA indicates S & M’s intent to assist Kelly practically,

by “caus[ing] the Escrow Agent to annually deliver” tax forms,

should the IRS pursue it regarding the tax obligations. It also

delineates Kelly’s agreement to reimburse S & M for expenses

incurred as a result of such assistance. As the district court

aptly noted, “If Kelly did not believe that it, not S & M, was

responsible for the QSF-level taxes, why would it agree to

indemnify S & M for its ‘cooperation’ in opposing efforts by the

IRS to collect those taxes from Kelly?” Kelly Capital, LLC, 873

F. Supp. 2d at 674. Finally, Kelly’s post-closing conduct

reveals that it believed it was responsible for the taxes. Not

only did it continue researching methods of avoiding the QSF-

level taxes; it failed to communicate to potential investors the

point it so adamantly argues here—namely, that S & M would pay

the taxes. “If Kelly had believed that S & M was obligated by

the ERTA to pay the QSF-level taxes, it simply could have so

said in its disclosure to investors.” Id. at 675. But it did

not. And its decision not to do so belies its claim against

responsibility here.

20
 Because the district court rested its decision on a finding

of ambiguity, it addressed the intricacies of the parol evidence

in much greater depth than we do here. We think it of some

import to note, however, that in its brief to this Court, Kelly

Capital does not contest the evidence on which the district

court relied. Rather, it simply contests the district court’s

determination of ambiguity and the methods by which it made that

determination. Because our discussion of this issue rests on an

assumption of ambiguity for the sake of argument only, we need

not address Kelly’s allegations in this regard.

III.

Kelly also takes issue with the district court’s

determination that it committed a material anticipatory breach

of the ERTA when it communicated to S & M that “it was not

liable for the QSF[] taxes.” “Anticipatory repudiation occurs

when, before the time for performance has arisen, a party to a

contract declares his intention not to fulfill a contractual

duty.” Lucente v. Int’l Bus. Mach. Corp., 310 F.3d 243, 258 (2d

Cir. 2002) (applying New York law); see also De Lorenzo v. Bac

Agency Inc., 681 N.Y.S.2d 846, 908 (N.Y. App. Div. 1998)

(indicating that repudiation occurs when one party “has

indicated an unqualified and clear refusal to perform with

respect to the entire contract.”). “The doctrine of

21
anticipatory repudiation entitles the nonrepudiating party to

immediately claim damages for a breach of contract where there

is a renunciation of the contract in which the repudiating party

has indicated an unqualified and clear refusal to perform with

respect to the entire contract.” De Lorenzo, 681 N.Y.S.2d at

907–08.

Here, Kelly’s indication that “it was not liable for the

QSF[] taxes” constituted repudiation of the contract. Kelly

maintains otherwise, averring that it “indicated its readiness

to perform the entire contract, subject only to a judicial

declaration of a particular element of the parties’

obligations.” We disagree. Regardless of whether Kelly was

ready to “perform the entire contract,” its determination not to

pay the QSF-level taxes was a declination of material

consequence. “[A] ‘material breach’ is a failure to do

something that is so fundamental to a contract that the failure

to perform that obligation defeats the essential purpose of the

contract or makes it impossible for the other party to perform

under the contract.” 23 Richard A. Lord, Williston on Contracts

§ 63:3 (4th ed. 2007) (footnotes omitted); see also Callanan v.

Powers, 92 N.E. 747, 752 (N.Y. 1910) (counseling that rescission

of a contract in the context of repudiation is reserved for

breaches that are willful or “so substantial and fundamental as

to strongly tend to defeat the object of the parties in making

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the contract”). S & M testified at trial that Kelly knew it was

responsible for the QSF-level taxes and that S & M would not

have entered into the ERTA unless it believed Kelly had assumed

the QSF tax burden. The district court found this testimony

credible, and we find no reason to conclude otherwise.

Accordingly, Kelly’s failure in this regard was material and

constituted a repudiation of the contract. Given such

repudiation, S & M was entitled to terminate its own

performance. Consequently, we affirm the district court’s

decision as to this point.

IV.

For the reasons above, we affirm the decision of the

district court.

AFFIRMED

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