Pike v. Freeman

• Decision Date: 01 August 2000
• Docket Number: RESPONDENT-APPELLANT,Docket No. 00-9161,PETITIONER-APPELLEE,BIO-PHARM,RESPONDENTS-APPELLEES
• Citation: 266 F.3d 78
• Parties: (2nd Cir. 2001) JOSEPH D. PIKE,, MEDAPPROACH, L.P., JEFFREY L. RUSH, M.D.,INVESTMENT, INC., DANCO INVESTORS GROUP, A/K/A NEOGEN HOLDINGS, L.P. N.D. MANAGEMENT, INC., DANCO HOLDINGS, L.P. A/K/A NEOGEN HOLDINGS, L.P. DANCO LABORATORIES, INC., DANCO PHARMACEUTICALS, INC. A/K/A NEOGEN PHARMACEUTICALS, INC.,, v. BRIAN M. FREEMAN,
• Court: U.S. Court of Appeals — Second Circuit

Page 78

266 F.3d 78 (2nd Cir. 2001)

JOSEPH D. PIKE, PETITIONER-APPELLEE,

MEDAPPROACH, L.P., JEFFREY L. RUSH, M.D., BIO-PHARM INVESTMENT, INC., DANCO INVESTORS GROUP, A/K/A NEOGEN

HOLDINGS, L.P. N.D. MANAGEMENT, INC., DANCO HOLDINGS, L.P. A/K/A NEOGEN HOLDINGS, L.P. DANCO LABORATORIES, INC., DANCO PHARMACEUTICALS, INC. A/K/A NEOGEN PHARMACEUTICALS, INC., RESPONDENTS-APPELLEES, v. BRIAN M. FREEMAN, RESPONDENT-APPELLANT.

Docket No. 00-9161

August Term, 2000

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: April 9, 2001

Decided September 26, 2001

Appeal from a judgment of the United States District Court for the Southern District of New York (Richard C. Casey, Judge) granting petitioner-appellee's motion to confirm an arbitration award against respondents and dismissing with prejudice respondent-appellant's counterclaim and cross-claims for indemnification asserted for the first time in the district court.

Affirmed in part, vacated in part, and remanded.

John K. Crossman, Zevnik Horton Guibord McGovern Palmer & Fognani, L.L.P., New York, Ny, for petitioner-appellee.

W. Gary Blackburn, Blackburn & McCune, P.C., Nashville, Tn, for respondents-appellees.

Richard DE Palma, Coudert Brothers, New York, Ny, for respondent-appellant.

Before: Walker, Chief Judge, McLAUGHLIN, and Sotomayor, Circuit Judges.

Sotomayor, Circuit Judge

Respondent-appellant Brian M. Freeman appeals from a judgment of the United States District Court for the Southern District of New York (Richard C. Casey, Judge) granting petitioner-appellee Joseph D. Pike's motion to confirm a July 15, 1999 arbitration award against respondents. In particular, Freeman challenges (1) the portion of the award finding him liable as a general partner of co-respondent Danco Investors Group, L.P., and (2) the district court's dismissal with prejudice of his counterclaim and cross-claims for indemnification based upon a finding that he waived those claims by failing to assert them in the arbitration. We agree with the district court that Freeman failed to demonstrate that the challenged portion of the arbitral award should be set aside. With respect to the district court's dismissal with prejudice of Freeman's indemnification counterclaim and cross-claims, however, we find that the district court's analysis of the counterclaim is based on an erroneous assumption, and that the district court erred in concluding that Freeman waived his indemnification claims by not asserting them in the arbitration. Consequently we vacate the dismissal with prejudice of Freeman's indemnification claims and remand for further proceedings consistent with this opinion.

BACKGROUND

The matter submitted to arbitration involved a dispute among Pike, Freeman, and other individuals and entities involved in a project to manufacture, distribute, and market an abortion-inducing drug in the United States (the "Project"). The patent for the drug in the United States is owned by a non-profit organization, The Population Council, which retained private entrepreneurs to carry out the Project.

Pike was initially the individual selected to be in charge of the Project. Given the Project's potentially controversial nature, Pike set up a complicated corporate structure to shield from publicity the entities playing key roles in the Project. As a result, those who invested in the Project did so by purchasing limited partnership interests in respondent Danco Investors Group, also known as Neogen Holdings, L.P. (the "Partnership"). The Partnership's general partner was respondent N.D. Management, Inc. ("N.D. Management").

I. The Engagement Contract

For reasons not relevant here, The Population Council eventually decided that Pike should extricate himself from any position of control within the Project. In connection therewith, Pike, individually and on behalf of N.D. Management, the Partnership, and "affiliated entities," hired appellant Brian M. Freeman's company, Brian M. Freeman Enterprises, Inc. ("BMF Enterprises"), to be the agent in negotiating and selling Pike's controlling interest in the various entities involved in the Project. Pike's retention of BMF Enterprises was documented in an engagement contract dated November 3, 1996 (the "Engagement").

II. The Agreement

In January 1997, Pike entered into an agreement to sell 75% of his 100% interest in N.D. Management to respondent MedApproach, L.P. and other "Participating Investors" (the "January Agreement"). In return for the sale and for fulfilling other obligations, Pike was to receive certain payments. Freeman, in addition to his role as the principal of BMF Enterprises, was listed in the January Agreement as one of the "Participating Investors" in the Project. The January Agreement also provided that, with respect to Pike's remaining interests, such as his remaining 25% interest in N.D. Management, Pike was to provide Freeman and two other individuals "an exclusive and irrevocable proxy and power of attorney... for all rights with respect to voting of stock or partnership interests in N.D. Management, Inc., [and] Neogen Industries, Inc., which shall also include all control, management and financial functions of each of the Pike Entities and the Project."¹ Freeman signed the January Agreement.

The January Agreement contained the following arbitration clause: "Any disputes hereunder shall be resolved by: binding arbitration by American Arbitration Association in New York City on an expedited basis."

The January Agreement was amended on February 5, 1997. Although the definition of "Participating Investors" was not changed, paragraph 10 of the amendment purported to exclude Freeman to a significant extent from the arrangements set up in the January Agreement, while leaving him responsible for certain specific obligations, including his duties as a proxy holder and holder of a power of attorney and his duty as a "Participating Investor" to make up any shortfall in investments received for the Project.

The January Agreement, amended on February 5, was again amended on or about February 12, 1997 (collectively, the "Agreement"). The February 12 amendment provided in relevant part that certain payments to Pike under the Agreement were to be given instead to BMF Enterprises to satisfy certain of Pike's obligations to BMF Enterprises under the Engagement. The February 12 amendment added, however, that "the remaining sections of the Engagement, remain in full force and effect."

III. The Arbitration

After a dispute subsequently arose as to whether Pike had performed his obligations under the Agreement and whether he was entitled to receive the payments promised to him thereunder, Pike sent a demand for arbitration on September 21, 1998, alleging "the respondents' breach of the Agreement." Freeman was one of the named respondents and was described as an "individual." Respondents filed an answer dated November 5, 1998, asserting as the Twenty-Second Affirmative Defense: "As to all claims... Freeman... [is] not properly before this tribunal for arbitration in that there are no agreements conferring such jurisdiction." Respondents, including Freeman, then participated in the selection of arbitrators and, eventually, in discovery. In February 1999, following a preliminary hearing, the arbitrators issued an order indicating that the parties had agreed that no explanatory supporting opinion would be provided when the arbitrators issued their ruling.

On March 1, 1999, Pike filed a "Written Specification of Affirmative Claims," which provided a summary of the breaches of the Agreement alleged by Pike:

Mr. Pike agreed to relinquish control and approximately 75% of his financial stake in the Project in return for $3,500,000 and an agreement by respondents to indemnify Mr. Pike for expenses incurred in connection with his role in the Project. Also, respondents promised Mr. Pike a position as a consultant for five years, with appropriate support and an annual salary of $300,000. Finally and most importantly, respondents assured Mr. Pike that they would protect the Project and the investors by purchasing any limited partner interests tendered in connection with a rescission offer they would make, and that they would contribute additional financing of $14,000,000.

Respondents have failed to fulfill any of these obligations....

The indemnification that Pike sought for expenses "in connection with his role in the Project" consisted of attorneys' fees and costs Pike incurred in obtaining dismissals or stays of lawsuits brought against him by certain respondents in late 1997 and 1998 - lawsuits Pike claimed should have been arbitrated. In addition, Pike sought "[a]n award of all costs in this arbitration proceeding, including attorneys' fees."

In a motion dated the same day, Freeman and co-respondents Jeffrey L. Rush and Bio-Pharm Investment, Inc. moved to dismiss the arbitration for lack of jurisdiction. The supporting memorandum of law stated that by virtue of Paragraph 10 of the February 5 amendment to the January Agreement, "Freeman [and the other movants] are not parties to any contract on which the instant Arbitration is based and thus have not consented to participate in this Arbitration." In opposition, Pike argued that Freeman and the other movants had waived their right to move to dismiss under New York State law by failing timely to object to the demand for arbitration. Freeman and the other movants subsequently filed a supplemental memorandum of law dated March 12, 1999, arguing that their objection was not waived, and that even if, under relevant state law, judicial review of arbitrability had been waived by failing to object sooner:

[Movants] have not waived the right to adjudication of this issue before the arbitrators. The arbitration clause in the January 21, 1997, Agreement provides that "[a]ny disputes hereunder shall be resolved by: binding arbitration by American Arbitration Association in New York City on an...