Duthie v. Matria Healthcare, Inc., No. 07 C 5491.

• Decision Date: 22 February 2008
• Docket Number: No. 07 C 5491.
• Citation: 535 F.Supp.2d 909
• Parties: Angus M. DUTHIE and Michael J. Condron, Plaintiffs, v. MATRIA HEALTHCARE, INC., Defendant.
• Court: U.S. District Court — Northern District of Illinois

535 F.Supp.2d 909

Angus M. DUTHIE and Michael J. Condron, Plaintiffs, v. MATRIA HEALTHCARE, INC., Defendant.

No. 07 C 5491.

United States District Court, N.D. Illinois, Eastern Division.

February 22, 2008.

COPYRIGHT MATERIAL OMITTED

Bradley Paul Nelson, Jose A. Lopez, Kristen Elizabeth Hudson, Schopf & Weiss LLP, Chicago, IL, for Plaintiffs.

Gregory J. Scandaglia, John Brendan Thorton, Scandaglia & Ryan, Chicago, IL, Charles R. Burnett, William N. Withrow, Jr., Troutman Sanders LLP, Atlanta, GA, for Defendant.

MEMORANDUM OPINION AND ORDER

JEFFREY COLE, United States Magistrate Judge.

INTRODUCTION

In December 2005, one of Matria Healthcare's subsidiaries, Coral Acquisitions Corp., merged with CorSolutions Medical, Inc. in a deal valued at almost a half billion dollars. Complex transactions generally beget complex documentation. This one was no exception. The Agreement and Plan of Merger ("Merger Agreement") spanned 71 single-spaced pages, and critical provisions turned in on themselves with the endless sinuosity of a us strip.¹ Like most agreements of its kind, it provided for post-closing adjustments, contemplated the possibility of disputes of varying kinds, and, depending on the dispute, provided for their resolution either through arbitration by the American Arbitration Association ("AAA") or other specified forms of enforceable, alternative dispute resolution. See e.g., Omni Tech Corp. v. MPC Solutions Sales, LLC, 432 F.3d 797 (7th Cir.2005); Creative Solutions Group, Inc. v. Pentzer Corp., 252 F.3d 28 (1st Cir.2001).²

An Escrow Fund containing $20,300,000 of the merger consideration was established to satisfy post-closing adjustments of: Initial Merger Consideration (§ 2.9); Tax Disputes (§ 5.12(h)); Escrow Fund Disputes (§ 7.4), and Benefits Improvement and Protection Act claims (§ 7.5(d)) with the remainder to be distributed as directed in the Merger Agreement. None of the stakeholders had any obligation to replenish or contribute any amounts to the Escrow Fund "under any circumstances." (§ 7.3(b)). The Merger Agreement provided that "Escrow Fund Disputes," which were those claims involving any breaches of the representations, warranties, and covenants made by CorSolutions in the Merger Agreement and which sought to be satisfied from the Escrow Fund, were to be resolved by the American Arbitration Association. (Merger Agreement § 7.4).

Matria has filed claims before the AAA against Messrs. Duthie and Condron personally, charging them with having made fraudulent misrepresentations and having fraudulently concealed material information in connection with the merger. Messrs. Duthie and Condron contend that the Merger Agreement does not permit the claims against them to be arbitrated.

Simply stated, the questions presented in this case are: 1) who makes the decision of arbitrability — a federal court or the American Arbitration Association panel; and 2) whether the Merger Agreement makes arbitrable a claim "involving fraud" (no matter how styled) where the claim is not against the Escrow Fund, but against corporate officers personally and seeks compensatory and punitive damages from them totaling perhaps as much as $120 million.³ Matria has conceded that its suit against Messrs. Duthie and. Condron before the AAA is indeed against them personally and seeks recovery from their personal assets. (Joint Stipulation ¶ 31). If Messrs. Duthie and Condron are right, the court is to make the determination of arbitrability, and Matria must be enjoined from proceeding with its arbitration claims against them. The parties have consented to jurisdiction pursuant to 28 U.S.C. § 636(c).

I. FACTUAL BACKGROUND⁴

The Coral Acquisitions-CorSolutions merger closed in January 2006 with CorSolutions becoming the surviving corporation. At the time of the merger, CorSolutions had about 50 million shares on a common equivalent basis outstanding, which included all common, preferred, warrant, and option holders. It had more than 450 common and preferred shareholders, with the majority of shares held by large, institutional investors, venture capital, and equity funds. (Joint Stipulation, ¶¶ 18-20). Once the merger was completed, CorSolutions stockholders were entitled to exchange their shares for cash proceeds that were to be paid out of the. "Initial Merger Consideration." (Complaint, Ex. A, Merger Agreement, at §§ 1.1, 2.3).

At the time of the merger, Mr. Duthie owned 2,556 shares of CorSolutions Common Stock and 75 shares of CorSolutions Series C Preferred Stock, as well as 182,000 stock options. His shares represented less than one-half of one percent ownership interest in the company. He reaped over $800,000 on those options in the wake of the merger. Mr. Condron held 1,000,000 stock options in CorSolutions at the time the Merger Agreement was executed, and executed 124,000 after it was signed, receiving over $1,145,000 in payment. Following the closing, he exercised the other 876,000 options, and received another $3.5 million. His one million shares were a 2.4% ownership interest in the company. (Joint Stipulation, ¶¶ 1-16). The Merger Agreement called individuals like Messrs. Duthie and Condron "Stakeholders." Pursuant to § 2.4(a) of the Merger Agreement, the Stakeholders appointed Coral SR LLC to act as their representative, agent and attorney-in-fact "for all purposes under this Agreement, the Escrow Agreement and the Agent's Escrow Agreement." (Merger Agreement, at § 2.4(a)).

Almost immediately after the merger, disputes arose over whether a particular matter was to be arbitrated by Ernst & Young or tried in court. Matria sued in the Chancery Court of Delaware to require Coral SR to submit the dispute to Ernst & Young. Ultimately, Matria spied two counts of fraud against Coral SR in its capacity as stakeholder representative (to be satisfied out of the Escrow Fund) based upon the claimed intentional misrepresentations and fraudulent concealment of certain material facts by officers of Coral Solutions. The court held that the proper forum for the accounting dispute was Ernst & Young and concluded that since Matria's claims for fraud were claims on the Escrow Fund, they should be dismissed. In the court's view, "regardless of whether [the claimed misrepresentations and omissions] are serious enough to be characterized fairly as fraud, they are to be resolved in the arbitration forum and not before a court." Matria Healthcare, Inc. v. Coral SR LLC, 2007 WL 763303 at *8.

Although the Chancery Court's opinion said nothing about claims involving fraud ,against corporate officers personally (rather than the Escrow Fund), Matria filed a three-count counterclaim in the AAA arbitration against Messrs. Duthie and Condron personally, seeking compensatory and punitive damages against them. In paragraph after paragraph, Matria accused them of having devised and executed a scheme to defraud and deceive Matria by withholding critical information, inflating revenues, and making numerous misrepresentations. See e.g., Counterclaim, ¶¶ 33, 36, 39, 56-60, 65, 70. Count I of the Counterclaim explicitly charged "fraud." Count II charged "equitable fraud," and Count III charged breach of contract. Counts II and III were based upon the acts and omissions alleged in Count I.

Count I concluded by alleging that Messrs. Duthie and Condron's fraud justified an award of punitive damages — even though § 7.4 expressly prohibited an AAA panel from awarding punitive or similar damages, and § 7.3(iv) stated that "[i]n no event shall any party hereto be liable for, and [Matria] acknowledges and agrees that the term `Damages' expressly excludes any consequential, treble, punitive or other damages not expressly provided for in this Article VII." Messrs. Duthie and Condron moved to dismiss the claims on jurisdictional grounds. Coral SR sought to dismiss the counterclaim since it sought relief beyond the monies in the Escrow Fund and punitive damages which could not be awarded under the Merger Agreement.

In a brief order, the Panel said that the issues presented by the motions "are complex and not free from doubt." The order recited the view of two members of the Panel who concluded that the ultimate resolution of these issues will benefit from the development of a fact record. Consequently, two arbitrators voted to deny all the motions without prejudice.⁵ Panelist Bittner would have granted the motions of Messrs. Duthie and Condron to dismiss for lack of jurisdiction. Messrs. Duthie and Condron then brought this action seeking a declaration that the fraud claims against them were not arbitrable and a preliminary injunction barring Matria from proceeding with the arbitration claims against them.

II. ANALYSIS

A. Standards For Injunctive Relief

The standards for determining, entitlement to injunctive relief are familiar. The moving party must demonstrate that: 1) a reasonable likelihood of success on the merits of its claim; 2) there is no adequate remedy at law; 3) it will suffer irreparable harm if injunctive relief is not granted, and that that harm outweighs the harm the opposing party will suffer if it is; and 4) the injunctive relief will not harm the public interest. St. John's United Church of Christ v. City of Chicago, 502 F.3d 616 (7th Cir.2007); Christian Legal Society v. Walker, 453 F.3d 853, 859 (7th Cir.2006).

B. The Plaintiffs Have Not Waived Their Right to Contest Arbitrability

Before turning to the merits, two questions must be answered. The first relates to Matria's claim that since the arbitrators by a 2-to-1 vote denied Messrs. Duthie and Condron's motion to dismiss the claims against them, they should not be allowed to have another go at it in the district court, but rather must see the arbitration through to its ultimate conclusion and then seek relief in the district court. Any other course, it is contended, would result in the needless squandering of everyone's time and resources, and thus contravene what Matria...