Though the shareholders of a corporation did not sign a corporate sale agreement, they were considered to be the sellers of the corporation, and therefore were entitled to avail themselves of the indemnification provisions under the agreement, ruled the Bankruptcy Court for the Eastern District of Pennsylvania. See In re NuNet, Inc., 348 B.R. 300 (Bankr. E.D. Pa. 2006).
In January 1999, Rudolph Geist contacted John Keown (“Keown”), CEO of NuNet (the “Debtor”), about purchasing U.S. Netway, Inc., which was suffering financial distress. In a letter dated Jan. 28, 1999 (the “Letter of Intent”), the basic terms and conditions of the transaction were outlined. The Letter of Intent was signed by Keown for NuNet and Edward J. Geist and Rudolph Geist for U.S. Netway. Approximately six weeks of negotiations followed.
The sale agreement ultimately was executed March 8, 1999. The agreement stated that in exchange for NuNet’s acquisition of 200,000 shares of U.S. Netway Capital Stock, NuNet would assume the outstanding debts and liabilities of the U.S. Netway and its sellers at the time of closing.
On March 24, 2005, the Debtor filed for chapter 11 bankruptcy relief. Five proofs of claim were filed by members of the Geist family (the “Geist Claimants”). The Debtor objected to three clams filed by the Geist Claimants, including a claim for attorneys’ fees incurred by the Geist Claimants for law suits arising from obligations assumed by NuNet under the sale agreement.
To determine the validity of the claims, the court looked to Pennsylvania state contract law, which deems a contract created when there is mutual assent to its terms by parties with the capacity to consent. A contract must be construed by ascertaining and giving effect to the intent of the parties, which is accomplished by examining the entire contract, the overarching purpose of the agreement, and the circumstances surrounding the transaction.
In the current case, U.S. Netway was in financial peril and the sale agreement was intended to save it from demise. Although the agreement was negotiated over a period of weeks, it was executed quickly with only three drafts exchanged between the parties. With this background in mind, the court examined the disputed claim.
The Geist Claimants filed claims that included those for debts incurred from three lawsuits relating to NuNet debts and liabilities. The Debtor objected to the Geist Claimants’ claim for attorney’s fees. The Debtor claimed that the issue was governed by paragraph 10 of the sale agreement, which required each party to “indemnify and hold the other parties harmless from and against all liability…including attorney’s fees” incurred as a result of the other parties’ breach of the Agreement.
The Debtor stated that this indemnification does not extend to the Geist Claimants because the “parties” to the sale agreement were NuNet and U.S. Netway, and did not include the Geist Claimants as individual shareholders. The Debtor relied on the fact that only the two corporations, and not the Geist Claimants as shareholders, signed the final draft of the sale agreement.
The court overruled the debtor’s objection, noting that under Pennsylvania law, signatures are not required on a contract unless such signing expressly is required by law or by the intent of the parties. A written contract that is not signed by one of the parties is still valid if both parties manifest their assent to its terms, and the essential terms of the contract are settled. Mere presence of a signature line does not determine if the parties intended to be bound only upon execution of the requisite signatures, the court held. Instead, the court focused on whether the parties agreed to the terms in question and intended to be bound by them.
The court noted that the text of the sale agreement refers to the “Sellers” and the “Purchaser.” “Sellers” is a plural term, and in other portions the Agreement, the Sellers, and not the Corporation, were charged with making certain representations and warranties. Further, the sale agreement permitted NuNet to be released from its obligations under the agreement if each shareholder did not sign by April 9, 1999. NuNet did not exercise this option or express any concern with the fact that each individual seller did not produce a duly endorsed signature page.
The court found that the shareholders acted and performed their obligations under the sale agreement as if they had in fact each signed it. Therefore, the court concluded that the indemnifications set forth in paragraph 10 extended to the Geist Claimants as sellers.