Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-26-2007

Verma v. Polaris Software Lab
Precedential or Non-Precedential: Non-Precedential

Docket No. 05-5404




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Recommended Citation
"Verma v. Polaris Software Lab" (2007). 2007 Decisions. Paper 1207.
http://digitalcommons.law.villanova.edu/thirdcircuit_2007/1207


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                                                                 NOT PRECEDENTIAL

                     UNITED STATES COURT OF APPEALS
                          FOR THE THIRD CIRCUIT


                                    No. 05-5404


                                  ARUN VERMA;
                                   DATA, INC.,

                                                         Appellants

                                         v.

                      POLARIS SOFTWARE LAB LIMITED



                   On Appeal from the United States District Court
                            for the District of New Jersey
                            (D.C. Civil No. 00-cv-05500)
                      District Judge: Honorable Joel A. Pisano


                            Argued on December 5, 2006

                  Before: RENDELL and AMBRO, Circuit Judges,
                          and BAYLSON*, District Judge.

                               (Filed: April 26, 2007)



__________________

   * Honorable Michael M. Baylson, Judge of the United States District Court for the
     Eastern District of Pennsylvania, sitting by designation.
William D. Wallach [ARGUED]
McCarter & English
100 Mulberry Street
Four Gateway Center
Newark, NY 07102-0652
Counsel for Appellants
Arun Verma; Data, Inc.

Edward T. Kole [ARGUED]
Wilentz, Goldman & Spitzes
90 Woodbridge Center Drive, Suite 900
Woodbridge, NJ 07095
Counsel for Appellee
Polaris Software Lab Limited

                                        __________

                               OPINION OF THE COURT
                                     __________

RENDELL, Authoring Judge,

       Appellants Arun Verma and Data, Inc., appeal from the District Court’s dismissal

of their complaint, challenging that order of dismissal as well as the District Court’s order

precluding them from offering evidence at trial as to damages. We will vacate and

remand.

       The parties are familiar with the facts, and we will therefore only narrate those that

are necessary to our ruling. In May 2000, Polaris Software Lab Ltd. (“Polaris”) entered

into a Memorandum of Understanding (“MOU”) with Verma and Data whereby Verma

agreed to sell his share holdings in Data to Polaris under the terms set forth therein. The

MOU anticipated the execution of a comprehensive agreement. However, the terms of

the MOU were only to be varied by mutual consent of all of the parties.

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       Under the MOU, Polaris was to purchase the stock of Data from Verma for

$15 million together with $5 million of Polaris stock. Verma was to continue at Data as

president and a member of its board of directors.

       The MOU contained a provision whereby Data was to furnish financial

information enabling Polaris to conduct due diligence. Polaris agreed to complete the due

diligence in a maximum of twelve weeks, at which point the comprehensive agreement

was to be executed. The specific provisions setting forth these requirements then stated,

“Otherwise the SHAREHOLDER will be entitled to the entire Escrow amount as

liquidated damages.” Appx. 369A, ¶ 9a. Polaris and Verma each placed $100,000 in an

escrow account with Chase Manhattan Bank.1



   1
   The escrow provision stated as follows:

             f) POLARIS and the SHAREHOLDER, each will place
             $ 100,000 (USD one hundred thousand) in an Escrow
             Account with Chase Manhattan Bank located in the State of
             New Jersey, USA, or any other mutually acceptable third
             party. POLARIS’ amount will be a non-refundable deposit to
             be adjusted towards the cash payment to be made at the time
             of the comprehensive agreement, while SHAREHOLDER’s
             contribution it to assure Polaris that the information furnished
             by SHAREHOLDER are correct and free from any
             falsification or willful suppression of any material
             information. SHAREHOLDER will forfeit the total amount
             in Escrow to POLARIS in such an event in accordance with
             the terms of Section 9 of this MoU. All escrow monies will
             be turned over to SHAREHOLDER at the time the
             comprehensive agreement is signed.

Appx. 367A, ¶ 3(f).

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       In September of 2000, Verma was told that the deal was being called off. In

November 2000, Verma and Data brought suit against Polaris for “the damages caused by

its breach of contract, fraudulent inducement, and breach of implied covenant of good

faith and fair dealing.” The complaint recounted the events leading up to the signing of

the MOU, as well as all of the efforts made by Data and Verma during the due diligence

period, including the engagement of a CPA firm to audit Data’s financial statements as

requested by Polaris. The Amended Complaint sought damages for breach of contract,

fraudulent inducement by misrepresentation, breach of implied covenant and good faith

and fair dealing, and sought compensatory and consequential damages together with

interest, attorneys’ fees and costs of suit.

       Polaris defended on the basis that the damage claim was limited to the $100,000

escrow and, also, that since Verma and Data had come forth with no real evidence of any

damages, they would be precluded from offering evidence of damages at trial. Verma

and Data urged that the liquidated damage provision pertained to the failure to complete

due diligence and was not intended as the exclusive remedy for breach. Data further

argued that the liquidated damages provision only applied to Verma as

“SHAREHOLDER” and not to Data.

       Polaris filed a motion in limine seeking a ruling from the District Court in its favor

to preclude damage evidence at trial and, also, a ruling that the liquidated damage




                                               4
provision was to be binding on Verma and Data. The District Court granted the motion,

stating:

              Mr. Verma, in discovery and in his deposition under oath,
              cannot and has failed to set forth with any factual basis that
              would be admissible as evidence any damages claimed above
              and beyond the liquidated damages clause provision in the
              memorandum, I would preclude any damages claim, any
              evidence of any damages because there simply isn’t any
              evidentiary support for one.

Appx. 25A.

       The case was then ready for trial. However, the parties decided to enter into a

consent agreement (“Consent Agreement”) whereby they would seek review of the

District Court’s in limine ruling. The Consent Agreement, which was thereafter entered

by the District Court as a consent judgment (the “Consent Judgment”) stated as follows:

              1. The plaintiffs’ breach of contract claim for liquidated
              damages under the MOU and Polaris’ breach of contract
              counterclaim for liquidated damage sunder the MOU be and
              are hereby voluntarily dismissed pursuant to Federal Rule of
              Civil Procedure 41, without any admission of wrongdoing or
              liability by either party.

              2. If the plaintiffs appeal from the trial court’s Order dated
              November 27, 2001, and if that Order is affirmed, Polaris
              shall pay the plaintiffs $100,000 in liquidated damages,
              without any admission of liability or wrongdoing, in final
              settlement of the plaintiffs’ claims, within sixty days of the
              order of affirmance, and all of the parties’ claims in this
              matter shall be concluded.

              3. If the plaintiffs appeal from the trial court’s Order dated
              November 27, 2001, and in the event that Order is reversed
              and remanded to the trial court, the plaintiffs and Polaris shall
              be permitted on remand to assert all the claims being

                                              5
              dismissed pursuant to paragraph 1 of this Consent Judgment,
              and both parties shall be permitted to assert any and all
              defenses they may have to the other’s claims, without being
              precluded from doing so by any principles of preclusion,
              including but not limited to the principles of collateral
              estoppel and/or res judicata, and (subject to any ruling by the
              Court of Appeals for the Third Circuit) the parties shall be
              placed in the same position that they were in prior to the entry
              of this Consent Judgment.

Appx. 3A-4A.

       Thereupon, an appeal was taken to our court, and we dismissed for lack of

jurisdiction in light of the fact that no final order had been entered in the District Court

case, as further proceedings in the event of reversal were anticipated and agreed upon.

       Our precedent establishes that consent orders are only final and appealable if they

provide for the end of the litigation no matter the outcome on appeal. Verzilli v. Flexon,

, 425 (3d Cir. 2002); accord Federal Home Loan Mortgage Corp. v.

Scottsdale Ins. Co., 

, 438–40 (3d Cir. 2003). Here, the Consent Judgment

provided for a full trial in the event of reversal, and failed to provide at all for our

dismissal. Thus, we held that it was not an appealable final order.

       Thereafter, Polaris argued to the District Court that since neither of the conditions

set forth in the Consent Judgment had occurred – that is, that there was no affirmance and

no reversal – the case should be dismissed. The District Court agreed and the case was

thereupon dismissed. This appeal then followed.




                                               6
       We conclude that in dismissing the case, the District Court misconstrued the

Consent Judgment. The Consent Judgment provided for two eventualities on appeal:

affirmance and reversal. In order to make the order appealable, the Consent Judgment

provided for dismissal of plaintiff’s claims, thus arguably ending the case. However, as

we perceived on that appeal, the case was not to be over if certain things occurred.

Examining the Consent Judgment, we find no mention of the eventuality that actually

occurred, namely, our refusal to entertain the appeal based upon lack of finality of the

District Court’s order and the resulting lack of jurisdiction.

       We have no doubt that the Consent Judgment was a manufactured way to obtain

review of the District Court’s interlocutory orders so as to avoid the need for a trial if the

we affirmed, while allowing for trial if we reversed the District Court. Equally clear is

the fact that the Consent Judgment was not entered into in anticipation of, nor did it

provide for, a dismissal of the appeal based upon lack of jurisdiction. It anticipated only

an affirmance or a reversal. Accordingly, we can find no basis for the District Court’s

having dismissed the case as if that had been an agreed-upon eventuality; the eventuality

that actually occurred had not been contemplated or agreed upon. The manufactured

“dismissal” in the Consent Judgment was a stipulated attempt to obtain finality, so as to

be able to resolve the case via an appeal. Dismissal of the case following our dismissal of

the first appeal was not an outcome that had been agreed upon in this situation.




                                               7
       The District Court should have recognized that the Consent Judgment was tainted

by a mutual mistake: the belief that it was a final order for purposes of 28 U.S.C. § 1291.

A mutual mistake renders a consent order—like any other contract—voidable. See

Lampley v. Davis Mach. Corp., 

, 1259–60 (N.J. Super. Ct. App. Div.

1987) (holding that settlement agreements are voidable for mutual mistake). Instead of

“enforcing” the voidable Consent Judgment over Verma and Data’s objection, the

District Court should have declared it of no effect and allowed the parties to proceed as

though it had never been entered.

       Effectively, the District Court’s subsequent dismissal of the case prevented the

parties from considering the changed circumstances and denied them the opportunity to

decide how to proceed. Clearly, all parties should then have revisited the issue of how

and whether the trial should proceed, based upon the mutual mistake as to the availability

of resolution by way of appeal. The District Court’s failure to give Verma and Data

another day in court was error.

       Because of this error, we will vacate the District Court’s order. In so doing, we

hold that the Consent Judgment has been voided. We remand for further proceedings,

leaving the parties with no final order and no binding consent agreement—the position

they were in the day the District Court’s in limine ruling was entered. Whether they

proceed to trial, effect a new settlement, or engage in other dispositive motions practice,

is up to them.



                                             8
       We will reach no other issue presented on appeal, because the case is to proceed in

the District Court. To decide the propriety of other orders entered by the District Court

now that we are remanding would be to provide review of interlocutory, non-final, orders.

As we indicated on the first trip made by this case to our court, we will not do so.

       Accordingly, we will VACATE the order of the District Court dismissing the case

and REMAND to the District Court for further proceedings consistent with this opinion.

_______________




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