Schafer v. Multiband Corp.
| Decision Date | 19 February 2013 |
| Docket Number | Case Number 12-13152 |
| Parties | BERNARD SCHAFER et al., Plaintiffs, v. MULTIBAND CORP., Defendant. |
| Court | U.S. District Court — Eastern District of Michigan |
Honorable Thomas L. Ludington
Section 410(a) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1110(a), declares that "any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy." Section 410(b), in turn, provides that insurance may be purchased to cover a fiduciary's potential liability. § 1110(b). Release agreements are thus void — insurance agreements, enforceable.
In the underlying arbitration in this case, the question for the arbitrator was whether indemnification agreements are void or enforceable. The arbitrator concluded that all such agreements are void. In doing so, the arbitrator disregarded clearly established legal precedent (including that of the Sixth Circuit) that such agreements are enforceable. Because this principle is clearly defined and the arbitrator refused to heed it, his decision will be vacated.
Plaintiffs Bernard Schafer and Henry Block founded Michigan Microtech, Inc., in 1985. Microtech sells and installs satellite television equipment.
In 2000, Microtech entered into a series of agreements with DirecTV. Among them was an agreement that Microtech would be the exclusive service provider of DirecTV for residential customers in Michigan. The relationship proved profitable. So Plaintiffs looked to expand to other markets.
In 2003, Plaintiffs acquired interests in a company providing similar services in Kentucky, DirecTECH, Inc. Remaining the sole owners of Microtech, Plaintiffs acquired partial ownership and management interests in DirecTECH. They also became members of the board of directors of DirecTECH.
In 2003, DirecTECH and Plaintiffs executed indemnification agreements. These agreements indemnify Plaintiffs for losses arising from their actions as directors of DirecTECH, except those caused by "deliberate wrongful acts or gross negligence," providing:
The Company hereby agrees to indemnify and hold the Board Member harmless from and against any and all past, present or future losses, claims, damages, expenses, or liabilities (including, but not limited to, reasonable attorney's fees, court costs, judgments, fines, excise taxes related to litigation or aggregate amount pain [sic] in reasonable settlement of any actions, suites [sic], proceedings, or claims) (hereinafter collectively referred to as "Loss"), incurred in connection with any and all actions, proceedings, or suits of any kind or nature whatsoever, which arises as a result of acts or omissions of the Board Member within the scope of his activities for and on behalf of the Company and which do not involve deliberate wrongful acts or gross negligence by the Board Member.
In 2004, Microtech executed agreements in favor of Plaintiffs containing an identical indemnification provision. Under the agreements, Plaintiffs are again indemnified for lossesarising from their actions as directors of Microtech — except those caused by "deliberate wrongful acts or gross negligence."
Also in 2004, Microtech formed an employee stock ownership plan ("ESOP") and employee stock ownership trust ("ESOT").1 Plaintiffs were named as trustees of the Microtech ESOP.
Again, indemnification agreements were executed in favor of Plaintiffs, with the agreements providing:
DirecTECH also formed an ESOP and ESOT. Plaintiffs, however, were not named as trustees of the DirecTECH ESOP.
To summarize, Plaintiffs receive the same indemnity as directors of DirecTECH and Microtech — and essentially the same indemnity as trustees of the Microtech ESOP. They areindemnified for losses arising from their acts as directors and trustees, except those losses caused by intentional misconduct or gross negligence.
About this time, owners of Microtech and DirecTECH looked to expand again. Seeking economies of scale, in June 2005 they joined with two other satellite television installation companies, DirectTECH Southwest, Inc., and JBM, Inc., to form a holding corporation, DirecTECH Holding Company, Inc. ("Holding Company").
Owners of the four entities (including the DirecTECH and Microtech ESOPs) then exchanged their ownership interests for shares of stock in the Holding Company. The Holding Company, in turn, became the parent company of the four entities.
The Holding Company also formed an ESOP and ESOT.
Plaintiffs were named directors of the Holding Company and trustees of its ESOP and ESOT. Once again, indemnification agreements were executed in favor of Plaintiffs. Again, the agreements contain the same indemnity protection Plaintiffs received as directors of DirecTECH and Microtech. For example, the "director indemnity agreement" provides:
The Company hereby agrees to indemnify and hold the Board Member harmless from and against any and all past, present or future losses, claims, damages, expenses, or liabilities (including, but not limited to, reasonable attorney's fees, court costs, judgments, fines, excise taxes related to litigation or aggregate amount pain [sic] in reasonable settlement of any actions, suites [sic], proceedings, or claims) (hereinafter collectively referred to as "Loss"), incurred in connection with any and all actions, proceedings, or suits of any kind or nature whatsoever, which arises as a result of acts or omissions of the Board Member within the scope of his activities for and on behalf of the Company and which do not involve deliberate wrongful acts or gross negligence by the Board Member.
Plaintiffs are likewise indemnified for losses arising from their acts as trustees of the Holding Company ESOP, except those caused by intentional misconduct or gross negligence.
The agreements also contain mandatory arbitration clauses providing that "any and all disputes arising pursuant to any of the terms of this Agreement or which relate in any manner whatsoever to this Agreement which cannot be resolved in a reasonable time by discussions between the Parties shall be submitted to arbitration in Mt. Pleasant, Michigan, before a sole arbitrator (the 'Arbitrator') selected from Judicial Arbitration and Mediation Services, Inc."
Establishing the scope of the arbitrator's authority, the agreements continue: "Final resolution of any dispute through arbitration may include any remedy or relief which the Arbitrator deems just and equitable, including any and all remedies provided by applicable state or federal statutes."
Also in 2005, the U.S. Department of Labor began investigating the Holding Company and its four subsidiaries. Specifically, it began investigating stock transactions involving the ESOPs and ESOTs. The department suspected that directors and trustees had breached their fiduciary duties by purchasing company stock for the ESOPs at inflated prices.
While that investigation was ongoing, Defendant Multiband Corp. began negotiating for the purchase of the Holding Company. In 2007, the parties agreed on a plan of acquisition and began transitioning operations to Defendant. During this transition, the Holding Company provided a detailed report of the department's investigation.
On January 1, 2009, Defendant completed the purchase of the Holding Company. For Plaintiffs' shares in the Holding Company, Defendant paid Plaintiffs $43.9 million. Defendant also executed an "indemnification agreement" and a "master assignment and assumptionagreement." Plaintiffs assert (and Defendant does not dispute) that these agreements were material to Plaintiffs' decision to sell. "Had Multiband not agreed to such indemnification obligations," Plaintiffs write, "the stock purchase price of $43.9 Million would have been substantially higher and/or the transaction would not have occurred." Pls.' Mot. to Vacate 6.
Both the inducement indemnity and the assumption agreement contain a mandatory arbitration clause (with the same terms quoted above).
The indemnification agreement provides that Defendant agrees to indemnify Plaintiffs for any losses "which arise as the result of acts or omission of the Board Member within the scope of his activities for and on behalf of [the Holding Company] . . . which do not involve deliberate wrongful acts or gross negligence by the board member." (Plaintiffs refer to this agreement as the "inducement indemnity.")
And the master assignment and assumption agreement provides that Defendant agrees to assume the agreements and obligations of the Holding Company, including the indemnification agreements with Plaintiffs. (Plaintiffs refer to this agreement as the "assumption agreement.") Specifically, the "assumption agreement" provided that Defendant "will assume all liabilities and contingent liabilities outlined in this Agreement."
The agreement further provides that the ...
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