Katz v. Feinberg
| Decision Date | 11 April 2001 |
| Docket Number | No. 99Civ.11705(CSH).,99Civ.11705(CSH). |
| Citation | 167 F.Supp.2d 556 |
| Parties | Norman KATZ, Petitioner, v. Herbert FEINBERG, Respondent. |
| Court | U.S. District Court — Southern District of New York |
William B. Fleming, Zuckerman, Spaeder, Goldstein, Taylor & Kolker, L.L.P., New York City, for petitioner.
Alan Heblack, Holland & Knight, L.L.P., New York City, for respondent.
This controversy has its genesis in the breakup of a long-enduring business partnership. The parties, formerly partners, now feud bitterly over the sale of one's interest in the business to the other. Disputes arose between them shortly after the sale and crystallized into claims including fraud, breach of fiduciary duty and breach of contract. These claims were brought before an arbitration panel in accordance with an arbitration clause in the governing Purchase Agreement. The arbitrators denied all of the claims and cross-claims except for petitioner Norman Katz's claim that the purchase price valuation was improperly calculated. Katz petitions this Court to confirm the arbitration award in its entirety pursuant to Section 9 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et al.1 Respondent Herbert Feinberg cross-moves to partially vacate and modify the award pursuant to 9 U.S.C. §§ 10, 11. Because I conclude that the arbitrators exceeded their authority in analyzing and re-fashioning the valuation prepared by independent accountants selected by the parties, I grant Feinberg's motion to vacate that portion of the award. In all other respects, the award is confirmed.
In 1976, Feinberg and Katz founded I. Appel Corporation ("I. Appel" or the "Company"), an apparel manufacturer. Each owned 50 percent of the common stock of the corporation, and their rights and obligations as shareholders were established by a Shareholders Agreement. Twenty years later, Feinberg agreed to purchase Katz's 50 percent interest in I. Appel. In connection with the buyout, the parties entered into a Purchase Agreement dated June 20, 1996. The Purchase Agreement did not quantify a final purchase price. Instead, it provided that the purchase price would be equivalent to half of the net worth of the Company as of May 31, 1996, determined in accordance with Section 5.3 of the Shareholders Agreement by the Company's independent accountants. The agreement required that at closing Feinberg would pay Katz $6,149,370, which represented the "Estimated Share Purchase Price" ("ESPP") based on the Company's 1995 audited Financial Statements, adjusted by unaudited internal statements through April 30, 1996.
After closing, the ESPP was to be adjusted upward or downward based on the "Final Share Purchase Price" ("FSPP"), which was to be determined by Mahoney, Cohen, Rashba & Pokart, C.P.A., P.C. ("Mahoney, Cohen"), I. Appel's independent certified public accountants. Section 2(b) of the Purchase Agreement established the guidelines by which Mahoney, Cohen was required to determine the FSPP. Because this is the core provision around which this controversy swirls, it is worth reciting substantially in full. In this section the parties agreed that:
[Mahoney, Cohen] ... (the "Company Accountants") shall determine the net worth of the Company and the purchase price of the Shares in accordance with Section 5.3 of the Shareholders Agreement (as modified by this Agreement) as promptly as practicable following the Closing (and in no event later than forty-five (45) days following the Closing). In determining the net worth of the Company as of May 31, 1996, the Company Accountants shall assume that the business practices of the Company in effect as of May 31, 1996, shall remain in effect notwithstanding the consummation of the transactions contemplated by this Agreement. In valuing inventory as of May 31, 1996, the Company Accountants are authorized to accept the quantities established in the inventory taken by the Company as of such date .... No party to this Agreement shall hold substantive discussions or meetings with the Company Accountants relevant to the determination to be made pursuant to this Section 2(b) without giving the other parties prior notice of such proposed discussions or meetings and affording such other parties a reasonable opportunity to participate in such discussions or meetings; provided, however, that any party may briefly answer factual questions from the Company Accountants without giving notice or affording participation rights to the other parties. Written communications to or from the Company Accountants relevant to such determination shall be provided to both Buyer and Seller. The determination by the Company Accountants of the final purchase price of the Shares (the "Final Share Purchase Price") shall be final and binding on Seller and Buyer and shall not be subject to any appeal, arbitration, proceeding, adjustment or review of any nature whatsoever. Promptly after determining the Final Share Purchase Price, the Company Accountants shall deliver to Seller and Buyer a written notice setting forth its determination of the Final Share Purchase Price (the "Determination Notice"). The Determination Notice shall set forth in reasonable detail the basis for the Company Accountants' determination of the Final Share Purchase Price and shall explicitly state that the Company Accountants have reviewed the financial and accounting records of the Company and have determined the Final Share Purchase Price in accordance with such records, the provisions of Section 5.3 of the Shareholders Agreement and this Agreement.
Purchase Agreement § 2(b) (emphases added.)
Section 5.3 of the Shareholders Agreement, to which the accountants were referred in calculating the FSPP, provides in relevant part that:
In the determination of the net worth of the Corporation, such determination shall be made by the independent certified public accountants than [sic] employed by the Corporation in accordance with generally accepted accounting principles applied on a consistent basis....
The Purchase Agreement contained an arbitration clause binding the parties in relevant part as follows:
(g) Arbitration. Except as provided in subsection (i) of this Section 14(g), all disputes under this Agreement, the Closing Date Promissory Note, the Final Promissory Note or the Pledge Agreement shall be settled by arbitration in New York, New York, before a panel of three arbitrators pursuant to the rules of the American Arbitration Association (the "Association"), but not under the auspices thereof.... Any award rendered by the arbitrators shall be conclusive and binding upon the parties hereto; provided, however, that any such award shall be accompanied by a written opinion of the arbitrators giving the reasons for the award. This provision for arbitration shall be specifically enforceable by the parties in the United States District Court for the Southern District of New York or the New York state courts in New York County, New York ... and the decision of the arbitrators in accordance herewith shall be final and binding and there shall be no right of appeal therefrom, except as otherwise provided by applicable law.
Section 14(g). The only exception to mandatory arbitration that the clause expressly references is contained in Section 14(g)(i) which provides that "[T]o the extent arbitration may not be legally permitted hereunder and the parties to any dispute hereunder may not at the time of such dispute mutually agree to submit such a dispute to arbitration either party may commence a civil action in a court of appropriate jurisdiction to resolve disputes hereunder." (emphasis added).
The closing under the Purchase Agreement took place on July 1, 1996. At closing, Feinberg paid Katz almost $3 million, representing loans Katz made to I. Appel, plus $1,537,342.50 — one quarter of the Estimated Share Purchase Price. Feinberg executed a promissory note (the "Closing Date Promissory Note") for the remainder. The principal amount of the Closing Date Promissory Note was subject to automatic adjustment based upon the determination of the FSPP.
As directed by the Purchase Agreement, Mahoney, Cohen determined the FSPP based on its valuation of I. Appel's net worth as of May 31, 1996. On October 10, 1996 (beyond the 45-day post-closing deadline the Purchase Agreement called for), and as clarified on November 5, 1996, Mahoney, Cohen issued its conclusion that the FSPP represented a total of $1,859,879-far lower than the $6,149,370 Estimated Share Purchase Price. In its notice of determination, Mahoney, Cohen certified that it had "determined the Final Share Purchase Price ... in accordance with your directions set forth in Section 5.3 of" the Shareholders Agreement as modified by the Purchase Agreement.2 The drastically reduced FSPP reflected to a large extent the significant downturn in I. Appel's fortunes in 1996. Although the parties quibble over the extent to which over-valued inventory caused the losses and when the losses began, there is no doubt that I. Appel encountered considerable financial difficulties including grave losses and a cash flow crisis in 1996. In April of 1997, the Company filed for Chapter 11 bankruptcy protection from which it emerged a pared-down entity in May of 1998, after a $15 million debt writeoff.
The parties have engaged in efforts to avoid their obligations under the Purchase Agreement ever since Mahoney, Cohen issued its determination. Feinberg refused to pay Katz the remainder owed on the purchase price as required by the Purchase Agreement and the Closing Date Promissory Note, and sought, through arbitration, rescission of the Purchase Agreement and a refund of the purchase money already paid Katz. For his part, Katz sought to have the Mahoney, Cohen determination declared invalid — first by an unsuccessful state court motion to enjoin issuance of the determination, and then through...
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