EQUILIBRIUM CATALYST INC v. SCALLAN (2025)

This case concerns the interpretation of a retirement plan regarding the payment and responsibility of the tax liability on certain retirement payments provided by Equilibrium Catalyst, Inc. (ECI), Plaintiff/Appellee, to the Defendants/Appellants, the representatives ¹ of the estate of Allen J. Schick (Schick Estate), sometimes collectively referred to as Appellants. Specifically, the dispute concerns whether ECI or the Schick Estate bear the tax liability on a certain category of payments from the retirement plan, as set forth in a 2015 Memorandum of Understanding (MOU) between the principals of ECI.

FACTS AND PROCEDURAL HISTORY

We will begin our analysis by reviewing the procedural history and facts, as well as evidence presented at trial, followed by the assignments of error.

ECI is an “S Corporation,” registered, filed, and listed as a Louisiana corporation with the Louisiana Secretary of State.

ECI sells FCC equilibrium catalysts worldwide and provides related services. It was established by Allen J. Schick (Mr. Schick) and Stephen V. Eversull (Mr. Eversull), who each own 50% of the company. Mr. Schick, a Certified Public Accountant, generally handled various accounting and business functions as well as sales for ECI. Later, William A. Kelly, Sr. (Mr. Kelly), a chemical engineer, left employment with a competitor to join ECI. Eventually, Mr. Kelly became an equal partner and decision-maker with Mr. Schick and Mr. Eversull. However, Mr. Kelly never opted to pay the required $1,600,000.00 to buy into the company to obtain an equity ownership position.

The principals of ECI, Mr. Schick, Mr. Eversull, and Mr. Kelly, executed the above-referenced MOU on May 12, 2015, providing a “Voluntary Retirement Option” for each of them. The MOU further provided that if a signatory died, and had not already selected the Voluntary Retirement Option, then “their death will constitute an automatic election of the Voluntary Retirement Option,” entitling their estate to receive MOU retirement payments. More specifically, the MOU provided for three types of retiree payments: (1) three months of deferred “compensation ․ to include income from all sources” (sometimes referred to as Paragraph 5(a)); (2) 12% of the Company's “compensation ․ to include income from all sources ․ until a total of $14,000,000 is paid and distributed to the retiree or his estate, whatever the case may be” (sometimes referred to as Paragraph 5(b)); and, (3) a return of the retiree's “Retained Equity” (sometimes referred to as Paragraph 5(c)). The dispute in this case only concerns the second category of retiree payments, also referred to as the Paragraph 5(b) Payments.

Following the November 15, 2019 death of the co-owner, Mr. Schick, the voluntary retirement protocol of MOU was triggered, and ECI started sending these Paragraph 5(b) Payments to the Schick Estate which would total the sum of $14 million dollars.² Pursuant to the MOU, on June 10, 2020, ECI and the Schick Estate executed a Stock Surrender Agreement to “implement certain transactions contemplated under the MOU․” The express terms of the Stock Surrender Agreement provide that: “[t]he Parties agree that this Agreement neither adds to, nor subtracts from, the rights and obligations provided by the MOU.” The Stock Surrender Agreement states in part ECI's position that the recipient of these MOU retirement payments is responsible for the taxes, which documented the disagreement between the parties. Although ECI and the Schick Estate agreed on the amounts due pursuant to the MOU, as well as the tax consequences of the 1st and 3rd type of payments, they disagreed regarding the classification of the Paragraph 5(b) Payments, for tax purposes. Following the signing of the Stock Surrender Agreement, ECI sent an IRS Form 1099 to the Schick Estate that included these Paragraph 5(b) Payments. However, in response, the Schick Estate informed the Internal Revenue Service (IRS) that ECI had “incorrectly reported” the disputed category of retirement disbursements to the Schick Estate, which in turn commenced this litigation.

ECI filed a petition for declaratory judgment regarding the interpretation of the MOU on May 29, 2020, alleging in part: “ECI and the Schick Estate dispute the proper interpretation of the compensation provisions of the 2015 MOU.”

On September 4, 2020, the Schick Estate removed the case to federal court, arguing that ECI's case presented a federal question of tax law, specifically the “tax classification determination of payments made pursuant to the 2015 MOU.” On September 7, 2021, the federal court rejected the Schick Estate's arguments and on September 10, 2021, remanded the case to state trial court.³

Upon remand, the Schick Estate filed numerous exceptions, including exceptions of lack of subject matter jurisdiction, improper venue, no cause of action, and no right of action. The trial court denied the Schick Estate's exceptions on May 27, 2022. The Schick Estate filed a writ application with this court, which was denied on January 23, 2023. The Schick Estate then sought a review from the Louisiana Supreme Court, which denied the writ on April 12, 2023.⁴

Pursuant to ECI's February 27, 2023 motion for a telephone scheduling conference, on March 30, 2023, the trial court conducted a teleconference with all counsel, and counsel for both the Schick Estate and ECI selected a bench trial date of September 11-12, 2023. Thereafter, the parties, through their respective attorneys, agreed to jointly reschedule the bench trial date for November 20-21, 2023.

On September 6, 2023, the Schick Estate filed its answer, affirmative defenses, and a demand for a jury trial. On September 15, 2023, the Schick Estate filed a motion for summary judgment. On September 18, 2023, the trial court issued an order for jury trial. On September 25, 2023, ECI moved to strike the Schick Estate's jury demand. On November 6, 2023, the trial court granted ECI's motion to strike the jury and denied the Schick Estate's summary judgment motion.

On November 13, 2023, the Schick Estate and ECI each filed a motion in limine to exclude certain parol evidence.

The case was tried by bench trial on November 20, 2023. On January 25, 2024, the trial court issued a judgment denying both parties’ respective motions in limine. On June 24, 2024, the trial court issued a judgment with written reasons, along with a notice of signing of judgment.

On July 12, 2024, the Schick Estate filed its motion for suspensive appeal. A notice of appeal was issued on July 24, 2024, and a suspensive appeal bond was filed by the Schick Estate on August 9, 2024.

ASSIGNMENTS OF ERROR

Appellants list their assignments of error as follows:

1. The District Court committed an error in granting Equilibrium's Motion to Strike Jury Demand.

2. The District Court committed an error in denying Schick's Motion in Limine to Exclude Parol Evidence.

3. The District Court committed an error in granting Equilibrium's Petition for Declaratory Judgment and denying Schick's Motion for Involuntary Dismissal.

STANDARD OF REVIEW

Trial courts are afforded wide discretion in determining whether to grant or deny declaratory relief. Louisiana Supreme Court Comm. on Bar Admissions ex rel. Webb v. Roberts, 00-2517 (La. 2/21/01), 779 So.2d 726. Although this decision is subject to an abuse of discretion standard of review, the judgment itself is still reviewed under the appropriate standard of review. Westlawn Cemeteries, L.L.C. v. Louisiana Cemetery Bd., 21-01414 (La. 3/25/22), 339 So.3d 548.

DISCUSSION

We will first examine the assignments of error related to the jury demand and motion in limine, and thereafter will examine the assignment of error related to the granting of ECI's petition for declaratory judgment, which concerns the principal issue as to the parties’ respective tax obligations as to the retirement payments paid and received from ECI.

Assignment of Error #1 (Jury Demand)

Appellants’ argument

Appellants argue the motion for jury demand was timely filed along with its answer pursuant to the deadline provided for in the La.Code Civ.P. art. 1733(C), i.e., within ten days of a defendant filing an answer. The Schick Estate filed its answer and a jury demand on September 6, 2023. The Schick Estate notes that the supreme court denied the Schick Estate's writ regarding its exceptions on April 12, 2023, and thus, the Schick Estate's answer was not due until after April 27, 2023. As the jury demand was made within 10 days of the filing of the Schick Estate's answer, the request was filed timely, and the Schick Estate is entitled to a trial by jury. Additionally, the Schick Estate contends that it never “waived” its right to a jury trial, as counsel for the Schick Estate simply agreed to a trial setting on September 11, 2023, and the trial court declined to designate the matter as a bench or jury trial in the order.

Appellants further argue that because the case was never set on the jury trial docket, the obligation to make the jury deposit never ripened. Instead, the matter was set for a bench trial beginning on November 20, 2023.

Appellee's argument

ECI contends that the Schick Estate's counsel attended the trial court's scheduling conference and pursuant thereto the trial court set, without objection, the case for bench trial and that no evidence in the record suggests that counsel for the Schick Estate did not have the authority to schedule the bench trial. Additionally, ECI argues that the Schick Estate did not timely file its answer and filed their request for jury demand more than ten days after the last pleading, which had been a February 27, 2023 motion for status conference. Additionally, ECI notes that the Schick Estate also never posted a jury bond.

Analysis

Where counsel consents to a bench trial and counsel has the required authority to do so, the party thereby waives its right to a jury trial. Revel v. Telecheck Louisiana, 581 So.2d 405 (La.App. 4 Cir), writ denied, 588 So.2d 1116 (La.1991). The right to a jury in a civil trial is not constitutionally mandated. Riddle v. Bickford, 00-2408 (La. 5/15/01), 785 So.2d 795. If a “jury trial is not timely requested or sufficient bond not timely filed, the litigant loses the statutory right to a trial by jury.” Id. at 799.

Pursuant to La.Code Civ.P. art. 1733(C), a party must file its jury demand not more than ten days after the service of the last pleading directed to any issue triable by a jury.

Firstly, and as stated hereinabove, the record shows that on March 30, 2023, pursuant to a motion for a telephone scheduling conference, the trial court conducted a teleconference with all counsel, and counsel for both the Schick Estate and ECI, along with the trial court, selected a bench trial date of September 11-12, 2023. Thereafter, the parties, through their respective attorneys, agreed to jointly reschedule that bench trial date for November 20-21, 2023. We note that during the scheduling conference, counsel for the Schick Estate failed to raise an objection to the setting of this matter as a bench trial. Thus, as noted by the trial court, we find that the Schick Estate's counsel did in fact consent to a bench trial during the telephone status conference, and thus “waived” its right to a jury trial. Further, we find nothing in the record that indicates that counsel for the Schick Estate lacked authority to consent to a bench trial.

Additionally, the record shows that counsel for the Schick Estate again failed to object to the bench trial setting at the time of the trial. “When a party fails to raise any objection at the time of the trial with regard to lack of a jury, ․ and proceeds to present his case before the court, he waives his right to a jury trial.” Cortes v. Lynch, 02-1498, p. 13 (La.App. 1 Cir. 5/9/03), 846 So.2d 945, 954 (emphasis added) (citation omitted).

Finally, the Schick Estate did not timely post a jury bond. Therefore, we find the record fully supports the trial judge's denial of the Schick Estate's jury request, and thus, we find no reversible error by the trial court.

For these reasons, we find that the trial court did not err in granting ECI's motion to strike the Schick Estate's jury demand.

Assignment of Error #2 (Motion in Limine)

Appellants’ argument

The Schick Estate next argues that the trial court committed an error in denying the Schick Estate's motion in limine to exclude parol evidence (i.e., evidence to support ECI's interpretation of the terms of the MOU), arguing that La.Civ.Code art. 2046 bars parol evidence “[w]hen the words of a contract are clear and explicit and lead to no absurd consequences[.]” Specifically, the Schick Estate contends that the court should have barred parol evidence related to prior agreements between the signatories of the MOU because the MOU's terms are clear and comprehensive; the MOU contains an integration clause; and the tax classification of the Paragraph 5(b) Payments was not an “essential element” of the agreement. As there is no ambiguity in the MOU and the MOU is a complete agreement, the Schick Estate argues, the trial court's consideration of parol evidence in determining the “intent” of the parties constitutes a reversible error.

The Shick Estate further contend that courts of appeal consistently have held that parol evidence is prohibited when interpreting contracts that include integration or merger clauses, citing with particularity Condrey v. SunTrust Bank, 429 F.3d 556 (5th Cir. 2005). Condrey involved a contractual claim requiring the evaluation of a licensing agreement that included an integration clause. The dispute revolved around which party retained ownership of certain design documents, a provision not included in the agreement. The court found that the agreement was fully integrated and adequately described the parties’ intentions.⁵ The court excluded the parol evidence and held that Louisiana law bars parol evidence in such a case where the contract is unambiguous and where a merger clause confirms the intent of the parties that the contract be a fully integrated document. The court further determined that ownership of the design document was not an essential term of the contract requiring interpretation.

The Schick Estate contends that similarly, in this case, the MOU is also a detailed, multi-page agreement, plus 16 additional pages of exhibits, and is a “fully integrated document that embodies the intentions of the parties.” The Schick Estate notes that, much like the plaintiff in Condrey, ECI here is attempting to vary the terms of the original MOU, and like the Condrey court, the court here should exclude the parol evidence.

The Shick Estate note that it was unnecessary for the MOU to address the tax treatment of the Paragraph 5(b) Payments, as the United States Tax Code governs the rules for the tax treatment and reporting of the payments. The Schick Estate further notes that the tax treatment of Mr. Kelly's Paragraph 5(b) Payments was consistent with the United States Tax Code, proving that such tax provisions were not essential elements of the MOU. As the tax treatment of the payments was not an essential element of the MOU, parol evidence is not admissible to discuss the parties’ “intent,” and all such evidence should have been excluded from the record in this matter.

Furthermore, the Schick Estate avers that Mr. Kelly (a non-equity-owning signatory of the MOU) and Mr. Schick (an equity-owning signatory of the MOU) were always treated differently for tax purposes. For instance, during Mr. Schick's lifetime, he and Mr. Eversull received their income pursuant to Form K-1s, whereas Mr. Kelly received a Form 1099. As Mr. Kelly owned no stock, his Paragraph 5(b) Payments had to be considered ordinary income. On the other hand, Mr. Schick and Mr. Eversull each owned 50% of ECI; thus, pursuant to the Tax Code, they could treat any amount paid to them in excess of their tax basis in the stock as capital gains income and pay the tax rates applicable to capital gains. The Schick Estate reiterates that the parties did not make any agreement regarding the amount of tax due or how the payments would be classified for tax purposes, as Mr. Eversull admitted at trial.

The Schick Estate further notes that the IRS statutes classify “compensation” as wages, fees, and salaries “received” for services rendered during employment. However, the Schick Estate maintains that here, Paragraph 5(b) Payments were made in return for property, i.e., return of Mr. Schick's half of the ECI stock.

Appellee's argument

ECI notes that the Schick Estate accepted, without objection, the deposition testimony of Mr. Kelly in its entirety at trial, including Mr. Kelly's discussion of the parties’ preparation of the MOU language. ECI also reiterates the trial court's findings that the interpretation of “compensation” in the MOU is at the heart of the controversy, that parol evidence would assist the trial court in that interpretation, and that such evidence would not alter any term of the MOU, and thus not contradict the integration clause.

ECI further contends the previous performance of the parties demonstrate that the recipient of Paragraph 5(b) Payments was intended to pay income tax on those payments. Specifically, ECI argues that the record shows that: (a) Mr. Kelly elected the “Voluntary Retirement Option” and began receiving the Paragraph 5(b) Payments; (b) Mr. Kelly paid ordinary income tax rates on these payments; and, (c) Mr. Schick, as CFO of ECI, directed Form 1099s to be sent Mr. Kelly for these Payments, and ECI took deductions for the Payments. In other words, the parties’ previous behavior supports ECI's interpretation of the MOU and tax responsibilities.

Furthermore, ECI underscores that Mr. Kelly and Mr. Eversull testified that the parties arrived at the $14 million figure (i.e., the total amount of the Paragraph 5(b) Payments) in contemplation of the fact that the recipient would be responsible for the taxes on these Payments, thus allowing the recipients to net the original target amount of $10 million. ECI argues that this testimony corroborates its argument that “income” and “compensation” in Paragraphs 5(a) and 5(b) of the MOU mean “income that is taxable to the recipient.” ECI also contends that the Schick Estate has acknowledged that the “compensation” paid pursuant to Paragraph 5(a) is ordinary income and that the recipient bears an ordinary income tax burden. Likewise, ECI notes that Paragraph 5(b) uses the same contractual language as Paragraph 5(a) (“compensation ․ income from all sources”) and thus should be interpreted the same way.

Additionally, ECI argues that Condrey, 429 F.3d 556, is distinguishable from the present case. ECI contends that the plaintiff in Condrey offered parol evidence in order to vary the terms of the original agreement. The subject matter of the contract in that case gave the recipient (the defendant in Condrey) an exclusive right to certain intellectual property. The defendant/recipient had also created more documents that conceptualized the commercial realization of the intellectual property (i.e., the design documents referenced above). The plaintiff developer sued to obtain both the original intellectual property received by the defendant and the conceptualizations (design documents) created by the defendant/recipient. The contract contained an integration clause that acknowledged the parties’ prior discussions on the subject; thus, the court concluded parol evidence was not admissible. ECI contends that the Fifth Circuit's rationale in Condrey cannot be easily applied to the case here, as Condrey involved multiple agreements and a complex fact pattern.

ECI further argues that the integration clause in the MOU does not change the analysis, reiterating the trial court's finding that the MOU does not address taxes in any manner. Therefore, the integration clause would not bar parol evidence regarding the tax liabilities of the parties. ECI also argues that this case is about the definition of “compensation,” and thus, they sought a determination by the trial court that “compensation,” within the parameters of the MOU, meant “income taxable to the recipient.”

Finally, ECI argues that the adoption of the Schick Estate's argument would basically mean that no party is responsible for taxes, which the IRS would not allow.

Analysis

When the intent of the parties on a particular issue cannot be ascertained from the language employed in a contract, parol evidence is admissible to clarify the ambiguity or show the intention of the parties. Hyatt v. Mut. of Omaha Ins. Co., 14-282 (La.App. 3 Cir. 10/1/14), 149 So.3d 406.

“When there is ambiguity, then the court must construe the contract according to the intent of the parties, which is an issue of fact to be inferred from the surrounding circumstances.” Id. “A doubtful provision must be interpreted in light of the nature of the contract, and the conduct of the parties before and after the formation of the contract.” Hyatt, 149 So.3d at 411, citing La.Civ.Code art. 2053 (other citation omitted). “The parties’ undisputed course of conduct in interpreting an agreement in the years preceding the lawsuit may show their true intent.” McCartney v. McCartney, 52,209, p. 5 (La.App. 2 Cir. 8/15/18), 256 So.3d 1101, 1104-1105, citing Total Minatome Corp. v. Union Texas Prods. Corp., 33,433 (La.App. 2 Cir. 8/23/00), 766 So.2d 685.

As the trial court correctly noted, we find that the MOU does not address the tax treatment of these Paragraph 5(b) Payments. Thus, we find that the trial court's admission of parol evidence, regarding the interpretation of “compensation” for purposes of determining the tax liability of signatories of the MOU payments, does not run afoul of the integration clause contained in the MOU. As the parol evidence is admissible regarding the tax treatment of the Paragraph 5(b) Payments, we further find that the previous behavior of the parties, and testimony regarding that behavior, is also very relevant, particularly in that Mr. Kelly, as a non-equity owner principal, also received Paragraph 5(b) Payments upon his retirement.

Additionally, we find the fact that Mr. Kelly received these payments, despite owning no stock in ECI, greatly undermines the Schick Estate's argument that the Paragraph 5(b) Payments were made merely in exchange for Mr. Schick's stock, which the estate surrendered. Mr. Kelly's testimony that ECI deducted the Paragraph 5(b) Payments made to him is also apposite, as Mr. Schick, a Certified Public Accountant, who generally handled various accounting and business functions for ECI, would have been aware of these Paragraph 5(b) Payments to Mr. Kelly as income, as well as the tax deduction taken on said payments by ECI.

Finally, we find that the parol evidence demonstrating that Mr. Schick and Mr. Eversull would, as vested owners, have received a significant tax benefit from the deduction taken by ECI is also pertinent to the interpretation of the MOU.

Accordingly, we find no merit in this assignment of error.

Assignment of Error #3

(Declaratory Judgment and Motion for Involuntary Dismissal)

ECI is an “S Corporation,” registered, filed, and listed as a Louisiana corporation with the Louisiana Secretary of State. As an “S Corporation,” any income is passed along to its shareholders, who pay taxes on that income at their ordinary income tax rates. Mr. Schick was a half-owner of ECI and one of three principals of ECI during his lifetime.

The MOU that is at the heart of this litigation was negotiated over several weeks between the three principals of ECI, which included Mr. Schick, and was approved, accepted and signed by Mr. Shick, Mr. Eversull, and Mr. Kelly. As stated previously, this document does not specifically address the tax treatment of any category of retirement disbursements, including Paragraph 5(b) Payments. However, we find that comparative interpretation of certain language used in this document to be determinative of the outcome in this case.

Trial Court Judgment:

The trial court determined that the interpretation of the word “compensation” used in Paragraphs 5(a) and 5(b) of the MOU is determinative in the resolution of this matter, and that the tax issue regarding the Paragraph 5(b) Payments is ancillary to the interpretation of the MOU. We agree.

The trial court rejected the Schick Estate's argument that the Paragraph 5(b) Payments to the Schick Estate functioned as a “buyout” of Mr. Schick's share of ECI stock, as Mr. Kelly also received these payments but never exercised his option to purchase any ECI stock. The trial court also found that, based on the evidence and testimony presented, the parties intended that the recipient of the Paragraph 5(b) Payments to pay ordinary income tax rates on these Payments.

The trial court also determined that, because the integration clause contained in the MOU did not address the tax liability on the payments, the integration clause did not bar the introduction of testimony on the subject. Specifically, it did not bar parol evidence and testimony that demonstrated the parties’ understanding of the tax classification of the Paragraph 5(b) Payments. Thus, the trial court concluded that the credible testimony of ECI witnesses was both necessary to assist the trial court and properly introduced.

Additionally, the trial court granted ECI's motion to strike the jury demand but denied both parties’ cross-motions-in-limine. The trial court found that because the MOU did not address the tax liability, the integration clause did not bar evidence of agreements or understandings between the parties related to this issue.

Evidence presented at trial:

We will now provide a summary of the relevant testimony and evidence presented at trial as to this issue.

Mr. Kelly testified that the $14 million payout number was reached with consideration of the recipient's tax liability. At trial, and without objection from Appellants, ECI introduced the deposition testimony of Mr. Kelly wherein he stated that the $14 million number was agreed upon by the signatories, Mr. Eversull, Mr. Schick, and Mr. Kelly, in order to allow each recipient to “net” about $10 million after payment of income taxes individually by the recipient.

Mr. Kelly testified and explained:

We talked about how to, I guess, in a sense minimize, minimize taxes everyone, and what we decided was it was a whole lot -- we would pay a whole lot less taxes as a group if we just distributed the money directly from the company to the person and let the person pay their own taxes

․

[W]e were trying to figure out how to pay people, let's say, approximately $10 million net, and, so, by paying around that 14 million number, by the time I paid my income taxes, over time I would end up with around the $10 million. So, I -- you know, essentially that was sort of the method.

* * *

Q. ․ [Y]ou mentioned a number of $10 million or so. Was, was there -- was that the number that you were trying to compensate each person, in that amount, $10 million?

A. I would say that that's where it ended up, yes.

Q. Okay. And in order to do that, essentially you grossed up the payment so that the recipient would receive $14 million?

A. That is correct.

Mr. Kelly further explained that when he elected voluntary retirement and began receiving Paragraph 5(b) Payments under the MOU, ECI sent him a Form 1099 for the payments. Mr. Kelly assumed that ECI took the deductions for the payments, and testified that Mr. Schick, as CFO of ECI, would have been responsible for ECI's taxes. Therefore, Mr. Schick would have had knowledge of the agreement regarding taxes, as he would have been the person directing Form 1099 to be sent to Mr. Kelly. Furthermore, Mr. Kelly testified that Mr. Schick, as a 50% owner of ECI, would have personally benefitted from the deduction ECI took for the payments.

Like Mr. Kelly, Mr. Eversull also testified that the $14 million number was reached by the signatories, Mr. Eversull, Mr. Schick, and Mr. Kelly, with the recipient's income tax liability in mind. Mr. Eversull, the president of ECI, reiterated and confirmed the testimony of Mr. Kelly, that the signatories wanted the recipient to “net” $10 million; thus, the signatories elected payments totaling $14 million with the tax burden of these payments for each recipient in mind. In his testimony, Mr. Eversull specifically described the agreement as follows:

Well, Al [Schick] and I and Bill [Kelly] decided that after a couple of weeks of conversation that we thought $10 million was a number that we all would like to get. So, Bill came up with the idea and he was probably the smartest in the group when it came to that. He said, hey, if you're gonna get $10 million, let the company take the deduction, let's just ramp it up to $14 [million]. And that's exactly what we did.

․

Q. Okay, so you said you ramped it up from $10 million to $14 million.

A. To cover the individual's taxes.

Q. And so who, who under that scenario would, would end up paying the taxes?

A. The individual getting the $14 million dollars.

Q. The person receiving the $14 million?

A. Correct.

Q. Do you know whether all of the persons that signed the MOU were aware of how these compensation payments were determined?

A. All of us were aware of that.

Q. And how do you know that Mr. Eversull?

A. Through numerous conversations.

Q. Conversations with who?

A. William Kelly, Al Schick, Van Eversull.

․

Q. As a signatory to the MOU, was it your understanding that all of the persons signing the MOU, that's you, Mr. Schick and Mr. Kelly, agreed that ECI could deduct all of those compensation payments?

A. That's, that's what we all agreed to.

Q. And did yall in fact discuss that?

A. Yes, we did.

Q. And do you know whether or not all of the other signatories agreed to that too?

A. They all agreed to it.

Q. That would include Mr. Schick?

A. Mr. Schick as well.

Q. Would it include Mr. Kelly?

A. Mr. Kelly.

Mr. Eversull acknowledged, however, that he and Mr. Schick received their income pursuant to an IRS Form K-1, while Mr. Kelly received his income pursuant to Form 1099 because Mr. Kelly did not have an equity interest in the company. He also acknowledged that the Schick Estate was required to surrender Mr. Schick's stock in order to receive the Paragraph 5(b) Payments:

Q. And as an owner, both you and Mr. Schick received K-1s from the company that detailed the income to the IRS, correct?

A. Yes.

Q. On the other hand, Mr. Kelly never received a K-1, and he always received a 1099, correct?

A. For exactly the same amount of money that Al and I got.

Q. So, during the history of the company, at least while Mr. Kelly was involved, Mr. Schick's tax treatment via a K-1 was different than Mr. Kelly's, who was all 1099 income, correct?

A. Correct.

Q. And that different treatment was solely based upon Mr. Schick's equity ownership in the company, correct?

A. His what?

Q. Like the, the different tax treatment was solely based upon Mr. Schick's equity ownership in the company.

A. Yeah.

Q. Correct.

A. Yeah.

Q. But despite treating Mr. Schick and Mr. Kelly's income differently for tax purposes for the entire history of the company, now ECI is attempting to treat Kelly and Schick's income similarly?

A. That's what, that's what we all understood the MOU to do. The MOU says nothing about purchasing stock. It's just a, it's just an agreement between three individuals to get x dollars after you retired or you died.

Q. But Mr. Schick's right to receive the funds is contingent upon him returning his stock to the company, correct?

A. One of them. The other one was him dying.

Mr. Ronnie Dawson, the Schick Estate's expert and accountant, testified that the Schick Estate reported the Paragraph 5(b) Payments on a “Form 706 Estate Tax Return.” The Form 706 had listed the Paragraph 5(b) Payments as “payments for stock,” i.e., a capital asset. He acknowledged that the Form 706 document could have been incorrectly used if the parties agreed to a different tax arrangement but opined that the Schick Estate correctly paid taxes pursuant to the United States Tax Code (i.e., that it was appropriate for the Schick Estate to pay capital gains taxes on the Paragraph 5(b) Payments instead of normal income taxes). However, he acknowledged that he based his opinions of tax treatment solely on the information he received from the Schick Estate's lawyers. Mr. Dawson further testified that the Schick Estate could have paid income taxes on the Paragraph 5(b) Payments if such an agreement to do so had been in place. The Schick Estate had apparently never advised Mr. Dawson of ECI's position on the tax treatment of the MOU payments until his own deposition.

Notably, the Schick Estate agreed that it would owe income taxes on the MOU payments made to the Schick Estate pursuant to Paragraph 5(a). Furthermore, it was agreed that the Paragraph 5(b) Payments would be taxable, to one party or another, and that Mr. Schick would have been aware of that as CFO of ECI.

Following the trial, the trial court ruled in favor of ECI and issued a judgment with written reasons.

Discussion:

Appellants’ argument

The Schick Estate argues that the trial court committed an error in granting ECI's petition for declaratory judgment and denying the Schick Estate's motion for involuntary dismissal.

The Schick Estate contends that ECI has not alleged a claim ripe for, or capable of, declaratory judgment. First, there is no dispute regarding the payment of taxes based upon the terms of the MOU, as the agreement does not contain a single provision that references the tax treatment of Paragraph 5(b) Payments, as acknowledged by Mr. Eversull.

Second, the MOU's integration clause prohibits the consideration of any prior agreements, conversations, or behavior of the parties that pre-date the MOU. That the Paragraph 5(b) Payments to the Schick Estate fall within the scope of the MOU, and the MOU does not address taxes or the classification of payments for tax purposes. As such, there is no contractual basis for ECI's claim.

Third, the parties memorialized their disagreement over the tax liability in the Stock Surrender Agreement, agreeing that each party could maintain their respective positions and that “each party shall be solely responsible for any and all of its own income taxes, fees, costs, and/or expenses associated with the respective position taken by that party.” The Schick Estate argues that this agreement makes the allegations in ECI's petition meritless, mandating the dismissal of the alleged claim via the motion for voluntary dismissal made by the Schick Estate at the close of ECI's case.

The Schick Estate further argues that Mr. Kelly, as a non-equity-owning signatory of the MOU, had no basis for claiming capital gains treatment for the payments made to him according to the United States Tax Code, as all of his payment had to be considered ordinary income. On the other hand, Mr. Schick and Mr. Eversull owned 50% of ECI's stock. As Mr. Schick and Mr. Eversull had stock that they were obligated to return to ECI, they both would still have to report the income received to the IRS, but they could treat any amount paid to them that was over the underlying basis value of the stock as income and pay tax at the lower capital gains tax rate. Thus, pursuant to the United States Tax Code, both groups were responsible for paying taxes on the income. However, their tax rates were different, and upon retirement, Mr. Schick and Mr. Eversull would have to pay tax on the income received that was above their basis in the investment. The Schick Estate reiterates that it returned Mr. Schick's stock to ECI in consideration of the Paragraph 5(b) Payments. The Schick Estate further notes that the parties were aware of the different tax treatments each signatory would receive; thus, the net amount each would receive would differ. For instance, because Mr. Kelly was a Texas resident, he would not pay state income tax on the Paragraph 5(b) Payments.

Pursuant to the terms of the Stock Surrender Agreement, both parties filed their respective income tax returns, and the Schick Estate reported the receipt of the Paragraph 5(b) Payments, accounted for the Payments, and paid all applicable taxes. The Schick Estate notes that ECI does not owe any taxes because it took a deduction for the Paragraph 5(b) Payments to the Schick Estate. As ECI has taken its deduction, the Schick Estate has reported the income to the IRS and paid all required taxes, and the parties agreed that each party would be solely responsible for their own taxes, the Schick Estate contends there is no justiciable dispute pending between ECI and the Schick Estate that requires resolution, and the Schick Estate is entitled to judgment on its motion for involuntary dismissal.

The Schick Estate avers that the parties could have agreed how taxes were to be paid; however, there was no such agreement reached in this case, as it was not contained in the MOU, and the MOU contains an integration clause rendering the prior agreements moot. Pursuant to the Tax Code, the Schick Estate reiterates that Mr. Schick and Mr. Eversull only have to pay tax on the income received that was above their basis in the investment.

Appellee's arguments

ECI argues that ECI and the Schick Estate clearly have an existing, actual, and substantial dispute. Indeed, the Schick Estate has already filed a tax return with the IRS claiming that ECI “incorrectly reported” MOU payments to the Schick Estate. ECI notes that the Schick Estate also admits that one party or another must pay taxes on the $14 million in question and concedes that the current tax returns of ECI and the Schick Estate are conflicting on this point. It argues that the Schick Estate further acknowledges that if signatories to the MOU had agreed that the recipient of the Paragraph 5(b) Payments would bear the ordinary income tax liability, the Schick Estate could have simply paid the taxes. However, the Schick Estate contends the MOU signatories made no such agreement, putting their interpretation of the MOU in conflict with ECI's interpretation.

ECI underscores that parties frequently contract with each other regarding tax burdens. See, e.g., Guillory v. Broussard, 15-888 (La.App. 3 Cir. 5/18/16), 194 So.3d 764, writ denied, 16-1707 (La. 11/29/16), 210 So.3d 806; AWC, Inc. v. CSF Constr., Inc., 05-0865 (La.App. 4 Cir. 4/26/06), 931 So.2d 382, 384 (Louisiana sales tax); Brooking v. Brooking, 407 So.2d 1342, 1345 (La.App. 3 Cir. 1981), (“Appellee's position is that the parties actually agreed that the appellant would be liable for the appellee's total income tax debt for 1978[.]”). While ECI acknowledges that the IRS is not necessarily bound by a state court determination on an issue of federal taxation, it argues that its suit does not challenge tax authority determinations or federal tax laws. Furthermore, it does not contest the tax classifications of the transactions between it and the Schick Estate.

ECI argues that the MOU was reached to provide retirement income to the recipients, described in the MOU as “compensation.” ECI underscores that the fact that Mr. Kelly, who owned no stock, received the Paragraph 5(b) Payments as income/compensation greatly undermines the Schick Estate's argument that Paragraph 5(b) functioned as a “buyout” provision.

ECI reiterates that Paragraphs 5(a) and 5(b) of the MOU both provide for “compensation” and both derive such “compensation” from “income from all sources.” On the other hand, Paragraph 5(c) does not use the terms “compensation” or “income.” ECI notes that it and the Schick Estate are in agreement that Paragraph 5(a) “compensation” payments are taxable as “income,” while Paragraph 5(c) “retained equity” payments are not taxable as “income” to the recipient.

ECI argues that it properly introduced evidence showing that Mr. Schick and the other signatories/parties to the MOU all believed that ECI would deduct the Paragraph 5(b) Payments, while the recipient would bear the tax liability. ECI notes that during his lifetime, Mr. Schick received the benefits of this agreement, as the deductions for Paragraph 5(b) Payments to Mr. Kelly correspondingly reduced Mr. Schick's own personal income taxes significantly.

Analysis

In the context of a petition for declaratory judgment, a justiciable controversy is defined as “an existing actual and substantial dispute, as distinguished from one that is merely hypothetical or abstract, and a dispute which involves the legal relations of the parties who have real adverse interests, and upon which the judgment of the court may effectively operate through a decree of conclusive character.” Abbott v. Parker, 259 La. 279, 249 So.2d 908, 918 (1971). Furthermore, parties may contract with each other regarding tax liabilities, including income tax. AWC, Inc., 931 So.2d 382; Guillory, 194 So.3d 764. Thus, nothing in law or statute prohibits the parties from contracting with each other regarding the payment of the taxes, in this case, the tax liability on the Paragraph 5(b) Payments.

Furthermore, “[w]ords susceptible of different meanings must be interpreted as having the meaning that best conforms to the object of the contract.” La.Civ.Code art. 2048. Additionally, “[e]ach provision in a contract must be interpreted in light of the other provisions so that each is given the meaning suggested by the contract as a whole.” La.Civ.Code art. 2050.

ECI properly introduced evidence showing that Mr. Schick, Mr. Eversull, and Mr. Kelly all believed that ECI should take the tax deductions on Paragraph 5(b) Payments, and that the recipient would pay income taxes on those payments.

Further, the testimony and evidence ECI introduced showed a history of how these payments and disbursements were previously handled by ECI and each individual principal of ECI. Specifically, the evidence demonstrates that in the previous years prior to the death of Mr. Schick, all income and retirement disbursement payments made by ECI, and specifically as to the retirement of Mr. Kelly, were deducted by ECI as business expenses and reported via either a K-1 or Form 1099 to each of them, as principals to ECI, for filing with their own individual tax returns.

Additionally, and as previously stated, the fact that the evidence showed that Mr. Kelly received these payments, despite owning no stock in ECI, greatly undermines the Schick Estate's argument that Paragraph 5(b) Payments were made merely in exchange for surrender of Mr. Schick’ stock. We find that Mr. Kelly's testimony that ECI deducted the Paragraph 5(b) Payments made to him is also highly relevant, as Mr. Schick, a Certified Public Accountant, who generally handled various accounting and business functions for ECI, would have been aware of these Payments to Mr. Kelly as income, as well as the tax deduction by ECI for these disbursements/payments.

Furthermore, evidence was properly introduced that demonstrated that during his lifetime, Mr. Schick received the benefits of such an arrangement, as ECI taking the deductions for Paragraph 5(b) Payments to Mr. Kelly correspondingly lowered Mr. Schick and Mr. Eversull's own tax burden significantly.

Therefore, we find that the trial court did not err in rejecting the Schick Estate's argument that the “compensation” referenced in Paragraph 5(b) could only mean “payment for stock,” as Mr. Kelly, also a recipient of Paragraph 5(b) Payments, owned no stock. Likewise, we find that the trial court did not err in finding that the “compensation” in Paragraphs 5(a) and 5(b) was intended by the parties to mean “income taxable to the recipient at ordinary income tax rates of the recipient.” Thus, we find no merit in this assignment of error.

CONCLUSION

After review, we find no error in the trial court's judgment. First, the record fully supports the trial court's granting ECI's motion to strike the jury demand as, inter alia, counsel for the Schick Estate failed to object to the bench trial setting, and thus “waived” their right to a jury trial. Second, the trial court correctly denied the Schick Estate's motion in limine because the relevant language contained in the MOU was silent and did not address the payment of taxes. Thus, we find that the admission of parol evidence assisted the trial court interpretation of the MOU, and does not contravene the integration clause contained in the MOU. Third, we find the evidence and testimony presented fully supports the trial court's finding that the parties intended the recipients of the retirement payments, including the Paragraph 5(b) Payments, to personally and individually bear the income tax liability, regardless of whether those payments were distributed during the recipient's lifetime or upon the recipient's death.

DECREE

The judgment of the trial court in favor of Plaintiff/Appellee, Equilibrium Catalyst, Inc., is affirmed in its entirety. Costs of these proceedings are assessed to Defendants/Appellants, Vincent P. Scallan and Joseph A. Shick, in their capacity as Independent Co-Executors of the Succession of Allen J. Schick.

AFFIRMED.

FOOTNOTES

1.   Specifically, the Independent Co-Executors of the Schick Estate named as defendants in this matter are Vincent P. Scallan and Joseph A. Schick.

2.   The amounts paid and owed by ECI to the Schick Estate are not in dispute, and ECI continues to make all appropriate payments.

3.   Equilibrium Catalyst, Inc. v. Scallan, No. 1:20-CV-01159, 2021 WL 4076475 (W.D. La. July 28, 2021), report and recommendation adopted, No. 1:20-CV-01159, 2021 WL 4073622 (W.D. La. Sept. 7, 2021).

4.   Equilibrium Catalyst, Inc. v. Scallan, 22-0587 (La.App. 3 Cir. 1/19/23) (unpublished writ opinion), writ denied, Equilibrium Catalyst, Inc. v. Scallan, 23-0221 (La. 4/12/23), 359 So.3d 33.

5.   The Fifth Circuit opinion stated:The licensing agreement at issue is six pages long and contains eighteen subparts. The subparts discuss a wide variety of topics including: the fate of the Modtrack patents, consideration paid by both parties, a best efforts requirement, manufacturing and design standards, confidentiality, financial obligations, trademark issues, responsibilities of the contracting parties, termination of the agreement, rights of first refusal, patent infringement, and waiver of rights. The scope of the licensing agreement is conspicuously broad in that the document exhausts a spectrum of issues surrounding the parties’ contractual relationship. Harrell Equipment and Condrey labored to create a document that would elucidate their intentions, as well as plan for the future of their business endeavor.Furthermore, subpart seventeen “seals the deal” by providing, “This agreement sets forth the entire agreement and understanding between the parties as to the subject matter of this agreement and acknowledges all prior discussions between them.” This is a fully integrated contract.Condrey, 429 F.3d 556, 564. The Court also excluded the use of parol evidence by stating that the ownership of the design documents was not a necessary term for the agreement and stated:Therefore, because the drafters of the document included an exhaustive list of current concerns and future safeguards in the licensing agreement, we conclude that it is safe to say that a provision determining the ownership of the drawings and blueprints, unlike the provision in Honeywell, was not and is not a necessary term inadvertently omitted from the contract.Id., at 565.

ORTEGO, Judge.