United States Court of Appeals
For the First Circuit
No. 03-2561
DOMENICK NICOLACI; ROSALIE HASSEY;
LISA BOLING; LORI BOLING RANDALL,
Plaintiffs, Appellants,
JOHN NICOLACI,
Intervening Plaintiff, Appellant,
v.
JOEL ANAPOL; WALTER ANAPOL,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. George A. O’Toole, Jr., U.S. District Judge]
Before
Boudin, Chief Judge,
Lynch, Circuit Judge,
and Schwarzer,* Senior District Judge.
Todd A. Newman and Kent D. B. Sinclair, with whom
Charles R. Bennett, Jr., Louis J. DiFronzo, Jr., Hanify & King,
P.C. and Seyfarth Shaw L.L.C. were on brief, for appellant.
Frederic D. Grant, Jr., for appellee.
October 20, 2004
*
Of the Northern District of California, sitting by
designation.
SCHWARZER, Senior District Judge. Domenick Nicolaci,
Rosalie Hassey, Lisa Boling, and Lori Boling Randall, with John
Nicolaci as an intervening plaintiff-appellant (together “the
Nicolacis”), appeal the District Court’s dismissal of their
contractual and common law indemnification claims against Joel and
Walter Anapol (“the Anapols”). For the reasons stated below, we
affirm.
FACTUAL AND PROCEDURAL BACKGROUND
The Nicolacis are former shareholders in Cliftex
Corporation (“Cliftex”), a closely-held corporation. On
January 16, 1998, the Nicolacis, the Anapols and Cliftex executed
a Stock Purchase Agreement under which the Nicolacis sold their
shares back to Cliftex. The Anapols were officers, directors, and
shareholders of Cliftex at the time. The Nicolacis received
varying amounts of money for their shares, ranging from $1,000,000
paid to John Nicolaci, to $25,000 paid to Lori and Lisa Boling.
The Agreement included cross-releases by the sellers and the buyers
as well as an indemnity clause from the buyers to the sellers. The
release and indemnity given by Cliftex and the Anapols provided as
follows:
(b) Each of Cliftex, Joel Anapol and
Walter Anapol hereby:
(i) releases and discharges each
of the Sellers and their respective heirs,
representatives and assigns from and against
any claims, rights or causes of action which
such person may have against such Seller
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arising from any fact, circumstance or
condition existing on the date hereof, whether
or not such claims, rights or causes of action
are known to Cliftex, Joel Anapol or Walter
Anapol, as the case may be, provided, however,
that this release shall not cover or apply to
any claims arising under this Agreement or any
agreement or instrument delivered in
connection herewith; and
(ii) agrees to indemnify and hold
harmless each of the Sellers and their
respective heirs, representatives and assigns
from and against any claims, rights or causes
of action which relate to or which arise or
arose out of the business of Cliftex as
operated prior to or after the date of this
Agreement except to the extent the same have
been caused or incurred solely as the result
of the unauthorized and wrongful action of the
party seeking to be indemnified. . . .
(Emphasis added.)
About two and a half years later, in August 2000, Cliftex
filed a voluntary Chapter 7 bankruptcy petition in the District of
Massachusetts. A trustee of the estate was appointed. The Trustee
commenced an adversary proceeding in the Bankruptcy Court alleging
that the stock purchase constituted a fraudulent transfer and
demanding that the Nicolacis return the money they received in
exchange for their shares. The Nicolacis filed a third-party
complaint in the Trustee’s proceeding, asserting a claim for
indemnity against the Anapols for any liability incurred as a
result of the fraudulent transfer claim. On October 17, 2002, the
Bankruptcy Court dismissed the Nicolacis’ complaint for lack of
jurisdiction.
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The Nicolacis then commenced this action, again asserting
their indemnification claims against the Anapols under the
Agreement and Massachusetts common law. Treating the Anapols’
motion for judgment on the pleadings as a Rule 12(b)(6) motion to
dismiss for failure to state a claim, the District Court dismissed
the complaint, holding that the language of the Agreement
unambiguously excludes indemnification for claims arising out of
the stock purchase transaction. The court also rejected the
Nicolacis’ common law indemnification claim. The Nicolacis timely
appealed.
The District Court had jurisdiction under 28 U.S.C.
§ 1332 and we have jurisdiction pursuant to 28 U.S.C. § 1291.
DISCUSSION
I. STANDARD OF REVIEW
We review de novo “a district court’s allowance of a
motion to dismiss for failure to state a claim.” TAG/ICIB Servs.,
Inc. v. Pan Am Grain Co., Inc., 215 F.3d 172, 175 (1st Cir. 2000).
We “accept as true the well-pleaded factual allegations of the
complaint, draw all reasonable inferences therefrom in the
plaintiff’s favor, and determine whether the complaint, so read,
sets forth facts sufficient to justify recovery on any cognizable
theory.” Id.
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II. APPLICABLE LAW
“Federal courts sitting in diversity apply state
substantive law and federal procedural rules.” Correia v.
Fitzgerald, 354 F.3d 47, 53 (1st Cir. 2003). The parties agree
that Massachusetts law applies to both the contractual and common
law claims in this appeal.
III. CONTRACTUAL INDEMNIFICATION
Contracts of indemnity are to be “fairly and reasonably
construed in order to ascertain the intention of the parties and to
effectuate the purpose sought to be accomplished.” Shea v. Bay
State Gas Co., 418 N.E.2d 597, 600 (Mass. 1981). The Nicolacis
contend that the Trustee’s fraudulent transfer claim against them
falls within the Agreement’s indemnification clause and,
alternatively, that the clause is ambiguous on this point. We find
neither of these arguments persuasive. Reading the contract as a
whole, including the indemnification clause, the release clause,
and the exclusion of the date of execution of the stock purchase
agreement from the indemnification clause, we conclude that the
contract is unambiguous and the court was correct to enter judgment
against the Nicolacis.
A. The Language of the Indemnification Clause
The language of the Agreement limits indemnification to
claims “which relate to or which arise or arose out of the business
of Cliftex as operated prior to or after the date of this
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Agreement.” The Nicolacis contend that the Trustee’s claim
relates to or arose out of Cliftex’s business and offer four
arguments in support: (1) Cliftex and the Anapols were parties to
the stock purchase agreement; (2) the Anapols and Cliftex
benefitted from the stock purchase; (3) Cliftex funded the stock
purchase; and (4) the Anapols’ operation of Cliftex subsequent to
the Agreement led to the bankruptcy and the fraudulent transfer
claim.
The term “business,” in its ordinary and common usage,
refers to regularly repeated activity for profit.1 This definition
is supported by Massachusetts case law, which has long defined
“business,” in considering what constitutes income, as “an activity
which occupies the time, attention and labor of men for the purpose
of livelihood, profit or gain.” Brown, Rudnick, Freed & Gesmer v.
Bd. of Assessors of Boston, 450 N.E.2d 162, 164 (Mass. 1983);
Whipple v. Comm’r of Corps. & Taxation, 161 N.E. 593, 595 (Mass.
1928). The business of Cliftex, or the purpose which occupied its
employees’ time, attention and labor for livelihood, profit and
gain, was the manufacture of clothing. There may be scenarios in
which a company’s purchase of shares could come within the term
“business as operated,” however, here the purchase of shares was a
1
Black’s Law Dictionary defines “business” as an “employment
habitually engaged in for livelihood or gain.” BLACK ’S LAW DICTIONARY
211 (8th ed. 2004)(emphasis added). Webster’s defines “operation”
as “a process or action that is part of a series in some work.”
WEBSTER’S NEW WORLD DICTIONARY 949 (3d College Ed. 1998).
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one-time capital transaction unrelated to Cliftex’s recurring and
habitual operation of clothing manufacture.2 To the extent there
is doubt about the content of the term “business as operated,” it
is resolved against the Nicolacis in light of the contract as a
whole.
The Nicolacis’ argument that because the Anapols and
Cliftex benefitted from the purchase, it qualifies as the company’s
“business,” is similarly unpersuasive. If the company had no hope
of deriving any benefit from a transaction that may be evidence
that the transaction is not part of the business operation. But
the reverse is not true, as the discussion above indicates.
The argument that the Trustee’s claims arise out of
Cliftex’s business as operated because the Anapols’ operation of
Cliftex subsequent to the Agreement led to the bankruptcy and,
therefore, to the Trustee’s claim, lacks logic. The Trustee’s
claim regarding the stock purchase as a fraudulent transfer
“relates to” and “arose out of” the execution of the stock purchase
2
Massachusetts courts have noted the distinction, in the tax
context, between capital transactions and business transactions.
See Comm’r of Corps. & Taxation v. Filoon, 38 N.E.2d 693, 700
(Mass. 1941) (listing capital transactions and ordinary operations
as distinct sources of profit); Follett v. Comm’r of Corps. &
Taxation, 166 N.E. 575, 576-77 (Mass. 1929) (same). A
corporation’s repurchase of its own stock would not be considered
part of its ordinary business operations under either the common
usage of the term or as Massachusetts courts have interpreted such
language. See Brown, 450 N.E.2d at 164; Filoon, 38 N.E.2d at 700;
Follett, 166 N.E. at 576-77.
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itself. If the Agreement constituted a fraudulent transfer, it
became such immediately upon execution. The indemnification clause
itself expressly excludes claims on the date of the stock purchase
agreement, furthering our understanding that the clause did not
cover the repurchase agreement. While it is true that the
Trustee’s fraudulent transfer claim arose during and in the context
of the bankruptcy proceeding, the claim against which the Nicolacis
seek indemnification is that the transaction at issue, not the
prior or subsequent operations of the business, defrauded Cliftex’s
creditors. Further, as discussed below, the release clause is most
consistently read with the indemnification clause to exclude claims
arising from the stock repurchase.
B. The Agreement Is Not Ambiguous
Under Massachusetts law, contract interpretation is a
question of law for the court unless the contract is ambiguous. See
Coll v. PB Diagnostic Sys., 50 F.3d 1115, 1122-23 (1st Cir. 1995);
Edmonds v. United States, 642 F.2d 877, 881 (1st Cir. 1981). A
contract is ambiguous if “an agreement’s terms are inconsistent on
their face or where the phraseology can support reasonable
differences of opinion as to the meaning of the words employed and
obligations undertaken.” Lohnes v. Level 3 Communications, Inc.,
272 F.3d 49, 53 (1st Cir. 2001) (citation omitted). The question
whether a contract term is ambiguous is one of law for the court.
Alison H. v. Byard, 163 F.3d 2, 6 (1st Cir. 1998); Allen v. Adage,
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Inc., 967 F.2d 695, 698 (1st Cir. 1992). Ambiguity is not created
merely because the litigants disagree about the meaning of a
contract. See Byard, 163 F.3d at 6.
The Nicolacis contend, in the alternative, that whether
the parties intended to exclude the stock purchase transaction from
the indemnification clause is, at best, a question of fact. They
argue that the omission from the indemnification clause of specific
language about claims arising from the Agreement raises an inference
that such claims were intended to be covered because they are
specifically excluded from the release clauses.
In interpreting contractual language, we consider the
contract as a whole. Its meaning “cannot be delineated by isolating
words and interpreting them as though they stood alone.” Starr v.
Fordham, 648 N.E.2d 1261, 1269 (Mass. 1995). In the first paragraph
of the “General Releases” clause, the Nicolacis agreed to release
and discharge Cliftex and the Anapols from any and all existing
claims, except for “any claims arising under this Agreement.”3 It
would be inconsistent for the parties to have preserved their rights
to assert claims against each other arising from the Agreement, and
at the same time for the Anapols to agree to indemnify the Nicolacis
for such claims. These clauses, read together, indicate the intent
of the parties to leave in place all liability arising from the
3
There are two other exceptions, but they are not pertinent
here.
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Agreement itself. Far from being inconsistent, the clauses, taken
together, reflect the parties’ intent to exclude from the
indemnification clause claims arising under the Agreement. The
Trustee’s claim, arising out of the allegedly fraudulent nature of
the stock purchase transaction, is therefore not covered by the
indemnification clause.
The Agreement’s unambiguous language leaves no question
of fact to be resolved, and the contract must be enforced according
to its terms. See Edmonds, 642 F.2d at 881. We hold that, as a
matter of law, the terms of the Agreement exclude indemnification
for any liability arising out of the fraudulent transfer proceeding.
IV. COMMON LAW INDEMNIFICATION
The Nicolacis argue that Massachusetts recognizes a
common-law right to indemnity where an innocent or comparatively
faultless party is held liable for another’s wrongdoing. However,
this common law indemnity doctrine has been recognized only in
personal injury tort actions. See Decker v. Black & Decker Mfg.
Co., 449 N.E.2d 641 (1983); Rathburn v. W. Mass. Elec. Co., 479
N.E.2d 1383 (1985). Massachusetts courts have not applied this
doctrine to an alleged fraudulent transfer case.
The cases the Nicolacis cite do not state any general
rules that establish or imply a duty to indemnify in the present
circumstances. The cited cases address whether, in a personal
injury suit, a tortfeasor may seek indemnification from a more
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culpable tortfeasor. The Nicolacis concede that no Massachusetts
case has applied the common law indemnity doctrine in the context of
a fraudulent transfer proceeding. They rest their claim on the
absence of cases precluding the doctrine from being applied to the
present case.
The District Court appropriately dismissed this claim.
Federal courts sitting in diversity should be cautious about
“push[ing] state law to new frontiers.” Kelly v. Marcantonio, 187
F.3d 192, 199 (1st Cir. 1999). See also Taylor v. Aetna Cas. & Sur.
Co., 867 F.2d 705, 706 (1st Cir. 1989) (stating that plaintiffs who
choose a federal forum for litigation of state law claims cannot
expect the court to “blaze a new trail” (citation omitted)). In the
absence of authority supporting a common law right to indemnity in
fraudulent transfer cases, we find no basis for the Nicolacis’
claim.
CONCLUSION
For the reasons stated, we affirm the judgment of the
District Court dismissing the Nicolacis’ action.
AFFIRMED.
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