Zalkind v. Ceradyne, Inc.

In Zalkind v. Ceradyne, Inc. (2011) 194 Cal. App. 4th 1010, Ceradyne, Inc. (Ceradyne), entered into an asset purchase agreement (asset purchase agreement) with Stanley and Elizabeth Zalkind (the Zalkinds) and Quest Technology, LP (Quest), a limited partnership owned by the Zalkinds. Under the terms of the asset purchase agreement, Ceradyne purchased all of Quest’s assets for a price of $2.44 million, of which $300,000 was paid in cash and the remainder paid in unregistered shares of Ceradyne stock.

The asset purchase agreement required Ceradyne to use its best efforts to register the stock consideration with the Securities and Exchange Commission (SEC) so the shares could be sold on the public market. Ceradyne was required to file a registration statement within 30 days of the date of closing (May 14, 2004) under the asset purchase agreement, but Ceradyne did not file until August 19, 2004. On March 15, 2005, the SEC declared the registration of the stock effective.

The Seller’s Cause of Action

The Zalkinds and Quest sued Ceradyne in 2008, asserting that Ceradyne breached the asset purchase agreement by not timely registering the Ceradyne stock with the SEC. They alleged that the delay in registering the stock meant the Zalkinds could not take advantage of a temporary and significant rise in the price of Ceradyne shares between December 31, 2004, and January 12, 2005. The Zalkinds claimed that if they had been able to sell their Ceradyne shares during that time period, they would have realized $1,479,444.50 more than they ultimately did.

Ceradyne defended by arguing that the asset purchase agreement had a 24-month time limit for making claims for indemnification, and because the claim of the Zalkinds was covered by the indemnification provisions of the asset purchase agreement and was filed more than 24 months after the closing, the claim was time-barred. The Zalkinds argued that the indemnification provisions only applied to third-party claims and did not apply to direct actions between the parties.

The court found that although the terms “Indemnify” and “Indemnity” ordinarily refer to third-party claims, the may include direct claims, depending on the parties’ intent.  The court found that the agreement, as a whole, supported the interpretation that the indemnification provisions of the asset purchase agreement included direct claims of a party. For example, the buyer was required to indemnify the selling parties “from and against all Damages that arise from … any breach … by the Buyer of its covenants ….” In addition, the asset purchase agreement defined “Damages” in such a way as to distinguish between third-party claims and other claims for certain purposes, thereby suggesting that indemnification addressed claims other than third-party claims. Thus, the court held that the asset purchase agreement’s definition of indemnification included the direct claim for breach of contract against Ceradyne.

Section 14.4(a) of the asset purchase agreement provided that no claim for indemnification under the agreement could be made more than 24 months after the closing.  The court treated this clause as shortening the statute of limitations for breach of contract to 24 months. The Zalkinds and Quest filed their lawsuit in June 2008, more than 24 months after the covenant was breached, thereby making the action untimely.

The court said that agreements to shorten the statute of limitations do not violate public policy and are enforced if reasonable, and it noted that “reasonable” for this purpose means the shortened period provides sufficient time to effectively pursue a judicial remedy. The Zalkinds and Quest did not contend that the shorter limitations period of the asset purchase agreement was unreasonable. Therefore, the court upheld the granting of Ceradyne’s motion for summary judgment against the Zalkinds and Quest.


I don’t agree that a time limit for asserting a claim under an indem­nification clause in an agreement is necessarily the same as shortening the statute of limitations, and the court does not explain how it makes this leap. Ceradyne argued that agreements to shorten the statute of limitations should be narrowly construed, an argument that the court rejected. By making this argument, however, Ceradyne may have led the court to assume that the 24-month time limit for making an indemnification claim was a shortening of the statute of limitations for breach of contract.

The court does not state whether the asset purchase agreement expressly provided that the sole remedy for a breach of the covenants in the agreement was a claim under the indemnification sections.  In the absence of such a provision, it is not obvious that a breach of contract claim should be barred simply because it is not eligible for indemnification. Since this point was not discussed by the court, the question whether indemnification is the sole remedy in an acquisition agreement that does not expressly provide that the sole remedy for a breach is a claim under the indemnification sections should be considered unresolved.

The Buyer’s Cause of Action

Ceradyne filed a cross-complaint against the Zalkinds and Quest, asserting a single cause of action for securities fraud in violation of Corporations Code section 25401, alleging that the Zalkinds made misrepresentations and omitted material facts to inflate the value of Quest’s assets. The Zalkinds and Quest argued that Ceradyne suffered no damages under Corporations Code section 25501 and therefore could not recover a judgment.


Corporations Code section 25401 prohibits offering or selling a security by means of untrue or misleading statements of fact. Corporations Code section 25501 provides that a seller of a security who violates section 25401 is liable to the purchaser of the security, who may sue for either rescission or damages.

Corporations Code section 25501 permits recovery of damages by a seller of a security, as follows

Damages recoverable under this section by a seller shall be an amount equal to the difference between (1) the value of the security at the time of the filing of the complaint plus the amount of any income received by the defendant on the security and (2) the price at which the security was sold plus interest at the legal rate from the date of sale.  [Emphasis added.]

Although Ceradyne was the buyer of the Quest business, it is deemed to be the seller of the Ceradyne stock it issued to the Zalkinds. The price of the Ceradyne stock had fluctuated, and when the lawsuit was started by the Zalkinds and Quest, the price was $38.43 per share. When Ceradyne filed its cross-complaint, 11 months later, the price was $19.94 per share, or roughly half. Based on the asset purchase agreement, the price of the Ceradyne stock sold to the Zalkinds was $2.14 million.

After adjusting for interest and income received (as required by section 25501), if the date of filing the complaint by the Zalkinds and Quest was used, Ceradyne would have had damages of nearly $1.6 million, but if the date of filing the cross-complaint by Ceradyne was used the price received by Ceradyne (plus interest) exceeded the value of the stock, and therefore, Ceradyne would have had no damages.

The pivotal question, therefore, that the court had to decide was what the statute meant when it referred to “the complaint.” After an analysis of the purpose of the statute, the court decided that the term “the complaint” referred to the cross-complaint in this case.  Thus, Ceradyne had no damages for which it could recover.


Ceradyne argued it was entitled to rescission, but the court held that because Ceradyne did not sue for common law fraud and instead sued for violation of Corporations Code section 25401, Ceradyne’s remedies, both legal and equitable, were limited to those afforded by Corporations Code section 25501. Section 25501 provides that a person who has suffered from a violation of section 25401 may sue “either for rescission or for damages (if the plaintiff or the defendant, as the case may be, no longer owns the security).”  Because the Zalkinds no longer owned the security, Ceradyne was limited under section 25501 to recovering damages.

Furthermore, Ceradyne was not able to tender the consideration (the Quest assets) received in exchange for the stock. Quest had been fully absorbed into Ceradyne; Quest’s tangible assets had been sold or dissipated; its office lease had expired; its employees had been dispersed; and its proprietary information had been learned by Ceradyne. What Ceradyne argued in terms of “adjusting the equities” was nothing less than a form of monetary recovery that would be inconsistent with the damages limitations of Corporations Code section 25501.

The court upheld the granting of the Zalkinds’ and Quest’s motion for summary judgment against Ceradyne on the ground that Ceradyne had no damages, which the court held was its sole remedy.


Had the cross-complaint been filed, say, in August 2008 (60 days after the complaint was filed), instead of 11 months later, the stock price would have been even higher ($49 per share) than on the date that the Zalkinds filed ($34 per share).  A prompter filing of the cross-complaint would not just have preserved Ceradyne’s $1.6 million claim against the Zalkinds but it would allowed for a substantially greater claim. This was one of those situations where truly “timing is everything.”

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