Essex v. Burrowbridge

• Decision Date: 31 January 2008
• Docket Number: No. 27 Sept. Term, 2007.,27 Sept. Term, 2007.
• Citation: 178 Md. App. 17,940 A.2d 199
• Parties: ESSEX CORPORATION v. SUSAN KATHARINE TATE BURROWBRIDGE, LLC, et al.
• Court: Court of Special Appeals of Maryland

940 A.2d 199

178 Md. App. 17

ESSEX CORPORATION v. SUSAN KATHARINE TATE BURROWBRIDGE, LLC, et al.

No. 27 Sept. Term, 2007.

Court of Special Appeals of Maryland.

January 31, 2008.

Mark D. Gately (Scott R. Haiber, Hogan & Hartson, LLP, Baltimore and. Jessica L. Ellsworth, Washington, DC), all on brief, for appellant.

Gerald W. Heller (Bradford F. Englander, Jennifer D. Larkin, Linowes & Blocher, LLP, on brief), Bethesda, for appellees.

Panel: DEBORAH S. EYLER, WOODWARD and JOSEPH F. MURPHY, JR.,^* JJ.

DEBORAH S. EYLER, Judge.

In the Circuit Court for Anne Arundel County, The Susan Katharine Tate Burrowbridge, LLC, The Elizabeth Tate Winters, LLC, and The Andrew Patrick Tate, LLC (collectively, "Tate"), the appellees, sued Essex Corporation ("Essex"), the appellant, for breach of contract. Essex filed a petition to compel arbitration and a motion to stay or dismiss without prejudice pending arbitration. The court denied the petition to compel arbitration and accompanying motion "without prejudice."

Essex noted an appeal, asking whether the court erred in denying its petition to compel arbitration. For the reasons that follow, we answer that question in the affirmative, and therefore shall reverse the order of the circuit court and remand with instructions.

FACTS AND PROCEEDINGS

The Purchase Agreement

On February 28, 2005, Essex entered into a 70-page "Purchase Agreement" with Tate to acquire The Windemere Group, LLC ("Windemere"), Tate's wholly owned subsidiary. The purchase price is set forth in Section 2.2 of the Purchase Agreement. At Section 2.2(a), the Purchase Agreement states that the purchase price will be comprised of several elements, the last of which is payment on May 31, 2006, of an "Earn Out (as defined in Section 1...), less any amounts for which [Essex] exercises its right of offset pursuant to Section 12 of this Agreement."

The definition of "Earn Out" is:

[T]he sum derived by multiplying each dollar of EBITDA earned during the period March 1, 2005 through February 28, 2006 in excess of Five and a Half Million Dollars ($5,500,000) by the number ten (10); provided that in no event will the Earn Out exceed the sum of Thirty Million Dollars ($30,000,000) plus the amount of any offsets allowed the Purchaser under Section 12. For purposes of allocating the Earn Out, the Purchaser shall not allocate to [Windemere] or its Subsidiaries any additional or different expense items which are outside of the historic level of general and administrative expenses reflected in the Financial Statements, except for rent expense....

Section 1.1. "EBITDA" is "the consolidated earnings of [Windemere] and its Subsidiaries before interest, taxes, depreciation and amortization, calculated in accordance with [generally accepted accounting principles in the United States]." Id. Section 12 of the Purchase Agreement, entitled "Purchaser's Right of Offset," grants Essex "the right and option, but not the obligation, to offset and reduce the Earn Out" by certain sums more specifically described in subsections (a), (b), (c), and (d).¹ As pertinent to this appeal, Section 12 goes on to state:

Before [Essex] exercises any right of offset it shall provide [Tate] with written notice of the amount of the claim and its intention to exercise its right of offset. [Tate] shall have fifteen (15) days from receipt of [Essex's] notice to accept or reject the amount claimed by [Essex]. If [Tate] accept[s] the amount claimed by [Essex], [Essex] may exercise its right of offset under this Section 12, If [Tate] rejects the amount claimed by [Essex], [the parties] shall seek in good faith to resolve any differences they have with respect to the claim and offset amount during the fifteen (15) day period following [Tate's] rejection of [Essex's] claim. If the dispute is not resolved to the mutual satisfaction of [Essex] and [Tate] within such fifteen (15) day period, each party shall have the right to require that the dispute be submitted to arbitration before one (1) arbitrator selected jointly by the parties, applying such arbitration rules as the parties mutually agree, and if they cannot agree, applying the Commercial Rules of the American Arbitration Association ("AAA') without the need to institute an AAA proceeding. The ruling of the; arbitrator shall be final and binding on all parties hereto, and may be entered as a judgment in any court of competent jurisdiction. . . . In the event [Tate] reject[s] any amount claimed by [Essex] hereunder, or in the event of any dispute regarding the Earn Out, [Essex] shall have the right to retain and withhold the portion of the Earn Out equal to the amount of the disputed claim until the question of entitlement of [Tate] to delivery of all or a portion of such withheld amount of the Earn Out shall have been determined by (i) an agreement in writing executed by the [parties] or (ii) a final judgment of an arbitrator chosen in accordance with this Section 12. . . .

(Emphasis added.)

Finally for our purposes, the Purchase Agreement includes at Section 11.2 a provision governing "Post—Closing Maintenance of and Access to Information." It states, in pertinent part:

(a) The Parties acknowledge that after Closing each Party may need access to information or documents in the control or possession of another Party for the purposes of concluding the transactions herein contemplated, preparing Tax Returns or conducting Tax audits, obtaining insurance, complying with Legal Requirements, and prosecuting or defending third party claims. Accordingly, each Party shall keep, preserve and maintain in the ordinary course of business, and as required by Legal Requirements, all books, records, documents and other information in the possession or control of such Party and relevant to the foregoing purposes at least until the expiration of any applicable statute of limitations or extensions thereof.

(b) Each party shall cooperate fully with, and make available for inspection and copying by, the other Party, its employees, agents, counsel and accountants and/or Governmental Authorities, upon written request and at the expense of the requesting Party, such books, records documents and other information to the extent reasonably necessary to facilitate the foregoing purposes. In addition, each Party shall cooperate with, and shall permit and use reasonable commercial efforts to cause its former and present members, managers, directors, officers and employees to cooperate with, the other Party on and after Closing in furnishing information, evidence, testimony and other assistance in connection with any action, proceeding, arrangement or dispute of any nature with respect to the subject matters of this Agreement.

(c) The exercise by any Party of any right of access granted herein shall not materially interfere with the business operations of the other Party.

Events Post-Closing and Prior to Litigation

Closing went forward as scheduled on February 28, 2005. The first part of the purchase price, $44,157,000, was paid that day. That and the other parts of the purchase price except the Earn Out were paid as required and are not in dispute.

Fourteen months after the closing, on April 18, 2006, Essex retained an independent accounting firm to calculate the Earn Out that was due to be paid on May 31, 2006.

On May 5, 2006, Tate, by counsel, wrote to Leonard E. Moodispaw, President and Chief Executive Officer of Essex, stating that, based upon calculations made by accountants for Essex "every month during the period of the Earn Out," "the EBITDA achieved by Windemere has exceeded $11.3 million for the 12-month period ended [sic] February 28, 2006." That figure, counsel went on to observe, was greater than the EBITDA figure of $8,500,000 that "would provide the maximum Earn Out payment" of $30,000,000, under Section 1.1. In closing, counsel for Tate stated, "On behalf of the Sellers, I respectfully request that you confirm, in writing, your intent to pay the full $30,000,000 Earn Out on May 31, 2006."

That letter prompted a written response from Mr. Moodispaw, on May 17, 2006, in which he pointed out that the demand was premature, that Essex had retained an independent accountant to determine the Earn Out amount, and that he (Mr. Moodispaw) did not agree with certain comments by counsel for Tate about how the Earn Out was to be computed under the Purchase Agreement.

By letter of May 31, 2006, Mr. Moodispaw notified counsel for Tate that the Earn Out had been calculated as follows: "Using the agreed upon definitions in the Purchase Agreement and using the agreed upon EBITDA methodology set forth in the Purchase Agreement, we then took the allowable off-sets, as referenced in my letter of May 17, 2006 to arrive at the final Earn-Out amount of $13,123,966." The letter explained, in some general and some specific terms, how the Earn Out was computed, and attached a statement spelling out the precise calculations. The letter informed counsel for Tate that the, $13,123,966 Earn Out amount had been wired to his client that day.

The next day, counsel for Tate responded by letter, taking issue with Essex's calculation of the Earn Out and demanding the maximum Earn Out payment of $30,000,000. In the letter, counsel went on to demand that Tate be given "a complete copy of the financial information, financial models and workpapers utilized" by Essex's accountant as well as "full access, via computer log in and read access to all files, to all cost records and all financial reports relating to the Windemere Operations and Essex Corporate G & A [General and Administrative Accounts]." Counsel opined that access to the requested information "is required . . . pursuant to Section 11.2 of the Purchase Agreement" and closed by warning that Tate "ha[s] instructed ... that if such information is not made available promptly, [it is] prepared to institute legal proceedings to fully enforce the terms of the Purchase Agreement."

There...