Galli v. Metz - 973 F.2d 145 (2d Cir. 1992)

Rule:

The sellers’ warranty that there are no claims, legal actions, suits, arbitrations, governmental investigations in progress, or pending shifts the risk of an unknown tax claim from buyers to sellers. Sellers' belief that no tax claim is pending is irrelevant.

Facts:

This case arose from a dispute between defendant buyers, James T. Metz and Kathleen M. Metz, and plaintiff sellers, Frank A. Galli, Una G. Galli, John D. Yeager, and Elizabeth M. Yeager of a corporation. After the deal closed, a corporation’s subsidiary was assessed taxes, and a customer filed an action for gross receipt taxes. Defendants then learned that the subsidiary was named a third-party defendant in an environmental case. Defendants sought to reduce their monthly installment payments for the purchase. Plaintiffs invoked the acceleration clause of the promissory notes and filed a breach of contract action against the defendants. Defendants answered with a counterclaim asserting breaches of warranties, RICO violations, common law fraud, and entitlement to certain offsets against the purchase price. The district court found for the plaintiffs.

Issue:

Did the district court err when it denied the defendant’s breach of warranty claims?

Answer:

Yes.

Conclusion:

The court reversed the district court's judgment in a breach of contract action that rejected defendant buyers' claims against plaintiff sellers and remanded for further proceedings because the record was not clear whether the defendants waived the breaches or injured them. Furthermore, the court affirmed the trial court's finding that sellers were entitled to some adjustments, but it reversed and dismissed part of the sellers' refund claim.