James W. Healy, as Trustee of the James W. Healy Revocable Trust v. Franklin Electric Co., Inc.

2011 DNH 003

• Court: District Court, D. New Hampshire
• Decided: January 5, 2011
• Docket: 08-cv-503-PB
• Status: Published

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

James W . Healy, as Trustee of the James W . Healy Revocable Trust

v. Case N o . 08-cv-503-PB Opinion N o . 2011 DNH 003 Franklin Electric Co., Inc.

MEMORANDUM AND ORDER

I determined following a bench trial that Franklin Electric

Co., Inc. is liable to James Healy for breach of contract. In

this Memorandum and Order, I consider whether Healy is entitled

to prejudgment interest on his damage award.

I. BACKGROUND

Healy sold his business, Healy Systems, Inc., to Franklin in

September 2006. The Stock Purchase Agreement (“SPA”) that

governed the transaction required Franklin to pay Healy

$35,125,000 at the closing (the “Initial Purchase Price”) plus 5%

of the company’s net profits for each year of a five-year period

beginning on September 1 , 2006 (“the Additional Purchase Price”). Ten percent of the Initial Purchase Price, amounting to

$3,512,500 (the “Holdback Amount”), was placed in an interest-

bearing escrow account at the closing and was to be withheld for

two years. The SPA entitled Franklin to indemnification and

allowed it to set off Healy’s indemnification obligation against

both the Additional Purchase Price and the Holdback Amount in the

event Healy breached certain warranties in the SPA.

Franklin later claimed that Healy breached several

warranties in the SPA. Therefore, it refused to either release

the Holdback Amount or pay Healy any of the accrued Additional

Purchase Price because it claimed that it was entitled to

indemnification for past and future costs that exceeded what

Healy was otherwise owed. In response, Healy sued for breach of

contract and declaratory relief. At trial, I rejected all but

one of Franklin’s indemnification claims and determined that it

was entitled to offset only $374,612.91 against the Additional

Purchase Price. By agreement of the parties, I also left an

indemnification claim stemming from what the parties refer to as

the “‘915 Patent Litigation” unresolved and authorized Franklin

to withhold an additional $3,000,000 for this claim. Thus, I

determined that Franklin was entitled to withhold a total of

-2- $3,374,612.91 from the Additional Purchase Price.

The parties agree that the amount that Franklin owes Healy

as Additional Purchase Price, in the absence of any offsetting

indemnification obligations or accrued interest, is $1,682,745

for the first year, $3,848,378 for the second year, $2,826,027

for the third year, and $1,215,315 for the fourth year. When the

$3,374,612.91 that Franklin is entitled to withhold from the

Additional Purchase Price is deducted beginning in the first

year, it negates the amount that would otherwise have been owed

in the first year, and leaves $2,156,510.09 in Additional

Purchase Price from the second year, $2,826,027 in Additional

Purchase Price from the third year, and $1,215,315 in Additional

Purchase Price from the fourth year.1 Healy seeks prejudgment

interest on this remaining portion of the Additional Purchase Price.2

1 The SPA limited Franklin’s recourse with respect to the ‘915 Patent Litigation to the Additional Purchase Price and required Franklin to seek recourse for other indemnification obligations from the Additional Purchase Price before seeking recourse from the Holdback Amount. Thus, I have set off the money that Franklin is entitled to withhold only against the Additional Purchase Price. 2 Healy does not seek prejudgment interest on the Holdback Amount because the parties agree on the amount that has accrued to this point on that amount.

-3- II. PREJUDGMENT INTEREST STANDARD

State law applies to an award of prejudgment interest in

diversity suits. See Commercial Union Ins. C o . v . Walbrook Ins.

Co., Ltd., 41 F.3d 7 6 4 , 772 (1st Cir. 1994). In this case, the

SPA specifies that it is governed by Indiana law. SPA § 10.5.

Under Indiana law, “[a]n award of prejudgment interest is founded

upon the theory that there has been a deprivation of the

plaintiff's use of money or its equivalent and that unless

interest is added, the plaintiff cannot be fully compensated for

the loss suffered.” Bank One Nat’l Ass’n v . Surber, 899 N.E.2d

693, 705 (Ind. C t . App. 2009). Specifically, “[d]amages in the

form of prejudgment interest are warranted in a contract case if

the terms of the contact make the claim ascertainable and the

amount of the claim rests upon mere computation.” Id.

III. ANALYSIS

Franklin argues that Healy is not entitled to prejudgment

interest because Healy had no claim to the funds that Franklin

withheld. The SPA specifically provides that Franklin may seek

indemnification by withholding the Additional Purchase Price that

would otherwise go to Healy, which Franklin argues means that

-4- there was no “deprivation” upon which to base prejudgment

interest. See Bank One, 899 N.E.2d at 705.

Healy rebuts this line of argument by pointing out that

while Franklin was expected to (and did) argue throughout the

trial that withholding the Additional Purchase Price was

justified by the indemnification clauses in the SPA, it did not

at any point contest the principal amount of damages claimed by

Healy in the event there was no right to indemnification. In

support of its argument, Healy points to Wayne Township v .

Lutheran Hospital of Fort Wayne, 590 N.E.2d 1130 (Ind. C t . App.

1992). In that case, the Lutheran Hospital brought suit against

the town to recover expenses it incurred in treating indigent

patients. Id. at 1131. Wayne Township argued that “because it

contested certain patients’ eligibility for assistance, the

amount it owed Lutheran Hospital was not ascertainable,” and

therefore prejudgment interest could not be applied. Id. at

1134.

The Indiana Court of Appeals rejected that argument, noting

that “the test is not whether the parties have mutually fixed the

amount in dispute; rather, the question is whether the principal

amount is ascertainable by mere computation.” Id. (internal

quotations omitted). Because the identity of the patients and

-5- the amount of their medical expenses was already known, “[t]he

fact that Wayne Township contested its liability for the payment

of certain patients’ accounts did not render the amount any less

ascertainable.” Id. The Wayne Township case is easily

contrasted with situations where prejudgment interest has been

found to be inappropriate, usually when the trial court must

determine the value of losses claimed by the plaintiff. See,

e.g., Woodward v . Heritage Const. Co., Inc., 887 N.E.2d 9 9 4 , 1002

(Ind. C t . App. 2008)(finding that prejudgment interest was not

appropriate where the parties’ claims required the trial court to

determine the value of services rendered by the plaintiff

contractor).

This case is much closer to Wayne Township than to Woodward.

Here, as in Wayne Township, there is no dispute over the amount

that Healy was entitled to receive absent any liability, because

Franklin was simply withholding the undisputed payment amounts

that were spelled out in the SPA. While Franklin did dispute its

liability for withholding those funds, essentially claiming it

was due an offset as indemnification for other losses, that fact

did not affect the principal amount claimed by Healy. That

principal was ascertainable by simple addition of the agreed-upon

amounts of the Additional Purchase Price for each year that has

-6- elapsed. Because Franklin’s mere denial of liability is

insufficient to prevent the damages from being ascertainable,

prejudgment interest is appropriate on the funds Franklin

withheld while seeking indemnification.

This result is also consistent with the general policy

underlying Indiana’s prejudgment interest rule: ensuring that a

plaintiff is fully compensated for the loss suffered. See

Fackler v . Powell, 923 N.E.2d 973, 977 (Ind. C t . App. 2010)

(noting that “[p]rejudgment interest is awarded to fully

compensate an injured party for the lost use of money”). Here,

absent Franklin’s wrongful withholding, Healy would have received

undisputed amounts of the Additional Purchase Price. Receiving

that money without interest would not fully compensate Healy for

the time he has been deprived of the money.

It should be noted that although the parties did not agree

on a specific interest rate in the SPA, Indiana law provides for

prejudgment interest at the rate of eight percent per annum when

the parties do not otherwise agree on a rate. Ind. Code §24-4.6-

1-102. As the parties did not establish in the SPA an interest

rate for Additional Purchase Price funds that were wrongfully

withheld, this eight percent rule applies to those funds. See

Bank One, 899 N.E.2d at 706. The interest shall be calculated

-7- for each year beginning on the date that the amount first would

have become due absent Franklin withholding the money. See

Fackler, 923 N.E.2d at 977 (“Prejudgment interest is computed

from the time the principal amount was demanded or due . . . . ” ) .

IV. CONCLUSION

For the reasons stated above, I grant Healy’s request for

prejudgment interest (Doc. N o . 5 7 ) .

SO ORDERED.

/s/Paul Barbadoro Paul Barbadoro United States District Judge

January 5 , 2011

cc: Dennis M . Lindgren, Esq. Robert L . Kirby, Jr., Esq. W . Daniel Deane, Esq. Colin M . Proskel, Esq. David C . Blickenstaff, Esq. Jonathan M . Shirley, Esq. Joshua M . Wyatt, Esq. Daniel E . Will, Esq.

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