Major Energy Electric Services, LLC v. Horowitz

Background

Major Energy Electric Services, LLC, Major Energy Services, LLC, Respond Power, LLC, National Gas & Electric, LLC, and Spark Holdco, LLC sued Saul Horowitz, Mark Wiederman, Asher Fried, Michael Bauman, and Mark Josefovic. The plaintiffs are referred to in the opinion as the “Indemnified Parties,” and the defendants as the “Sellers.”

The Sellers sold their membership interests in Major Energy to National Gas & Electric, LLC for $80 million under a Membership Interest Purchase Agreement. The agreement contained representations and warranties about Major Energy’s tax filings, legal proceedings, and compliance with applicable laws. It also required the Sellers to indemnify the buyer’s affiliated companies for losses caused by breaches of those representations and warranties.

The plaintiffs sought reimbursement for two categories of losses. First, Major Energy Electric Services faced an Illinois Attorney General lawsuit alleging fraudulent marketing to Illinois residents. That case ended in a consent decree requiring a $2 million civil penalty, and the plaintiffs alleged they incurred another $866,270.20 in attorneys’ fees and costs. Second, the plaintiffs paid $436,271.34 in taxes, interest, and penalties that they alleged Major Energy had failed to pay in New York, Massachusetts, and New Jersey.

Motion to dismiss and Illinois marketing claims

The Sellers moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the complaint did not adequately allege a contract claim. On the representation concerning legal proceedings, Section 4.7(a), the parties agreed that the Sellers did not breach that provision because the Illinois Attorney General filed the lawsuit nearly two years after the sale.

The court held, however, that the plaintiffs adequately alleged a breach of Section 4.7(d). That provision concerned events or circumstances existing when the agreement was signed or the sale closed that might give rise to a legal proceeding. The court rejected the Sellers’ interpretation that the provision covered only proceedings already pending or threatened. The complaint adequately alleged that the marketing conduct existed when the agreement was signed and later became the basis for the Illinois lawsuit.

The court also held that the plaintiffs adequately alleged a breach of Section 4.8(a), which represented that each company complied in all material respects with applicable laws. The court concluded that this provision was not limited to violations known by the Sellers. It also rejected an absolute rule barring reliance on allegations in an unadjudicated government complaint at the pleading stage. The court therefore allowed the Illinois marketing-based Section 4.8 claim to proceed.

Unpaid-tax claims

For Section 4.4, the agreement required that taxes attributable to pre-closing tax periods be paid by the closing date, except as disclosed in Schedule 4.4. The court found that the schedule disclosed some, but not all, of the unpaid taxes.

The plaintiffs adequately alleged a Section 4.4 breach based on certain unpaid New York taxes owed by Major Energy Services and certain unpaid Massachusetts taxes owed by Major Energy Electric Services. The court identified the relevant New York filing periods as ending May 31, 2014; August 31, 2014; November 30, 2014; and May 31, 2016. The relevant Massachusetts periods ended July 31, 2014; August 31, 2014; October 31, 2014; November 30, 2014; December 31, 2014; and April 30, 2016.

The court found no Section 4.4 breach for certain other New York periods because the schedule disclosed the relevant tax returns, and no Section 4.4 breach for the New Jersey taxes because the schedule disclosed that the 2015 state returns had not been filed. The court also found that taxes for periods after the sale’s closing date were not pre-closing taxes covered by Section 4.4.

The court rejected the Sellers’ argument that the $600,000 loss threshold barred the tax claim. It held that the agreement did not unambiguously prohibit combining the Illinois litigation losses with the undisclosed tax losses. Because the Illinois losses alone exceeded $600,000, the plaintiffs adequately alleged losses above the threshold, with indemnification limited under the agreement to losses exceeding that amount.

The court rejected the plaintiffs’ attempt to base the unpaid-tax claims on Sections 4.7 and 4.8. Those provisions were general representations, while Section 4.4 specifically addressed tax filings and payments. Applying the contract rule against making specific provisions redundant, the court held that Sections 4.7 and 4.8 did not cover whether Major Energy had paid all pre-closing taxes.

Disposition

Judge Buchwald ordered that the Sellers’ motion to dismiss was granted in part and denied in part. The opinion does not separately identify in the conclusion which portions of the complaint were formally dismissed, but its analysis rejects the Section 4.7 and Section 4.8 theories based on the unpaid taxes while allowing the stated Illinois marketing and Section 4.4 tax theories to proceed at the pleading stage.