Severstal U.S. Holdings, LLC v. RG Steel, LLC

• Decision Date: 25 May 2012
• Docket Number: No. 11 Civ. 6922.,11 Civ. 6922.
• Citation: 865 F.Supp.2d 430
• Parties: SEVERSTAL U.S. HOLDINGS, LLC, and Severstal U.S. Holdings II, INC., Plaintiffs, v. RG STEEL, LLC, Defendant.
• Court: U.S. District Court — Southern District of New York

865 F.Supp.2d 430

SEVERSTAL U.S. HOLDINGS, LLC, and Severstal U.S. Holdings II, INC., Plaintiffs,

v.RG STEEL, LLC, Defendant.

No. 11 Civ. 6922.

United States District Court, S.D. New York.

May 25, 2012.

Skadden, Arps, Slate, Meagher & Flom LLP, by: Scott D. Musoff, Esq., Albert L. Hogan, III, Esq., New York, NY, for Plaintiffs.

Cadwalader, Wickersham & Taft LLP, by: Martin L. Seidel, Esq., Joshua R. Weiss, Esq., New York, NY, for Defendant.

OPINION

SWEET, District Judge.

Defendant RG Steel (“RG Steel” or the “Defendant”) has moved, pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 3, 4 and 5, to compel arbitration, appoint an arbitrator, and stay the declaratory judgment action commenced by the plaintiffs Severstal U.S. Holdings, LLC (“SUSH”) and Severstal U.S. Holdings II, Inc. (“SUSH II”) (collectively, “Severstal” or the “Plaintiffs”) against RG Steel. Based on the facts and conclusions set forth, the motion of RG Steel to compel arbitration and to stay this action is granted.

Assisted by eminent and highly-skilled counsel, the parties entered into a 63–page Stock Purchase Agreement (the “SPA”), dated as of March 1, 2011. The SPA provided for the purchase of the equity in three U.S.-based steel companies from SUSH by RG Steel. Notwithstanding the evident precision and detail of the SPA, these sophisticated parties vigorously dispute whether its arbitration provisions are enforceable as the buyer, RG Steel, contends, or whether the relief RG Steel seeks is limited to enforcement of the indemnification provided in the SPA. As has occurred regrettably in the past, even sophisticated parties and the best of lawyers do not agree on the effect of their jointly drafted contract.

Prior Proceedings

This action was commenced by the Plaintiffs on October 3, 2011 by the filing of their complaint seeking a declaratory judgment to bar the arbitration sought by RG Steel and to limit its relief to indemnification. On November 7, 2011, RG Steel sought an order to compel arbitration, appoint an arbitrator and stay this action.

The instant motion was heard and marked fully submitted on December 9, 2011.

The Facts

The facts are set forth in the complaint and the affidavits submitted by the parties and are not in dispute except as noted below.

RG Steel is a Delaware limited liability company that manufactures a variety of steel mill products, including hot-rolled, cold-rolled, and coated sheets, and tin mill products. SUSH is a Delaware limited liability company. It is the sole owner of the issued and outstanding equity interests of SUSH II, a Delaware corporation and former owner of the equity interests of Severstal Sparrows Point, LLC (“Severstal Sparrows Point”). SUSH and SUSH II are part of Severstal International, which has operations in Russia, the United States and elsewhere.

RG Steel, SUSH, SUSH II and Severstal Sparrows Point entered into a March 1, 2011 SPA, which provided that RG Steel would purchase the equity in three U.S.-based steel companies from SUSH. The facilities are located in Sparrows Point, Maryland, Warren, Ohio and Wheeling, West Virginia and were acquired by Severstal between May 2008 and August 2008. In connection with the transaction, RG Steel purchased all of the equity of Severstal Sparrows Point, which in turn owned all of the outstanding equity in Severstal Warren LLC (“Warren”) and Severstal Wheeling Inc. (“Wheeling”).

The SPA established a two-step process for determining the ultimate purchase price to be paid by RG Steel. First, the SPA required Severstal to calculate the “Initial Purchase Price” (the “IPP”), the actual cash amount to be paid by RG Steel at closing. The IPP had three components: (1) a negotiated amount of $125 million that would be adjusted by (2) the amount by which the estimated net working capital at closing exceeded or was less than a target amount of $450 million (the “Target Net Working Capital”) and (3) the amount by which the estimated bank debt at closing owed by the entities to be acquired exceeded or was less than a target amount of approximately $311 million (the “Target Net Citicorp Indebtedness”). SPA § 1.04(a).

Not less than two business days prior to closing, the SPA required Severstal to deliver to RG Steel, “a statement [the “Estimated Closing Statement”] setting forth an estimate of (A) the Net Working Capital (determined in accordance with Section 1.04(b)(ii)) and (B) the Net Citicorp Indebtedness ... as of the opening of the business on the Closing Date (the “Effective Time”). SPA § 1.04(a)(i). The SPA defines “Net Working Capital” as:

[T]he difference between the Company's and the Subsidiaries' consolidated (A) accounts receivable.. and inventories and (B) accounts payable, ... determined in accordance with GAAP [Generally Accepted Accounting Principles] consistently applied and following the policies procedures, principles and methods employed in preparing the Company's balance sheet as of December 31, 2010 included in the Financial Statements, and shall be calculated in the manner set forth on Schedule 1.04(b)(ii)....

SPA § 1.04(b)(ii).

Upon delivery of the Estimated Closing Statement, if the “Estimated Net Working Capital” exceeded the Target Net Working Capital, the difference would be added to $125 million. SPA § 1.04(a)(ii). If the Estimated Net Working Capital was less than the Target Net Working Capital, the difference would be subtracted from $125 million. Id. Similarly, if the “Estimated Net Citicorp Indebtedness” exceeded the Target Net Citicorp Indebtedness, the difference would be subtracted from $125 million and vice versa. Id.

Within sixty days of the Closing Date, Severstal was required to deliver to RG Steel a “Closing Statement” setting forth the “Net Working Capital,” calculated in accordance with Section 1.04(b)(ii), and the outstanding “Net Citicorp Indebtedness” on the Closing Date to set the “Final Purchase Price.” SPA § 1.04(b)(i). Under Section 1.04(b)(iii), RG Steel had thirty days to review the Closing Statement and prepare a “Protest Notice” contesting any items that it believed were improperly calculated. SPA § 1.04(b)(iii). Severstal then had thirty days to object to any items in the Protest Notice. Id. These final objections by Severstal were defined pursuant to the SPA as the “Contested Adjustments.” Id.

If the parties were unable to amicably resolve the Contested Adjustments, either Severstal or RG Steel would “be entitled to refer any remaining Contested Adjustments to an Independent Accounting Firm.” Id. In the absence of an agreement as to which firm, either party could “initiate such a referral to PricewaterhouseCoopers LLP (who will thereafter be considered the ‘Independent Accounting Firm’ [or “PwC”] ).” Id. If there were Contested Adjustments submitted to arbitration, the Independent Accounting Firm would then resolve the disputes within “thirty (30) days of its appointment or as soon thereafter as is reasonably practicable.” Id. The decision of the Independent Accounting Firm was to be “final and binding on, and shall not be subject to appeal by, Parent or Purchaser and may be entered and enforced by any court having jurisdiction.” Id.

After the final determination, the parties would prepare a “Final Closing Statement” setting forth the “Final Net Working Capital” and “Final Net Citicorp Indebtedness.” Id. If Final Net Working Capital was less than Estimated Net Working Capital, Severstal would pay RG Steel the difference, and vice versa. Id. Similarly, if Final Net Citicorp Indebtedness was greater than Estimated Net Citicorp Indebtedness, Severstal would pay RG Steel the difference, and vice versa. SPA § 1.04(b)(iv)-(v).

As part of the SPA, both parties made various representations and warranties. In Section 2.06(a), Severstal stated that the “unaudited consolidated financial statements of the Company and its Subsidiaries as of December 31, 2010, consisting of the balance sheet and the related consolidated statements of earnings and cash flows ... have been prepared in accordance with GAAP, consistently applied throughout the periods indicated.” SPA § 2.06(a). Section 2.23 also sets forth Severstal's representations and warranties with respect to “Inventory”:

Except to the extent that any such items are taken into account in the calculation of Final Net Working Capital ... (ii) the Inventory held by the Company and its subsidiaries does not consist, in any material amount, of items that are obsolete, damaged or slow-moving ... and is in good and merchantable condition in all material respects.

SPA § 2.23.

Article VIII of the SPA sets forth the parties' substantive rights and procedures with respect to indemnification in the event of a breach of a representation and warranty by either party. Section 8.06 provides that, in general, indemnification is the exclusive remedy for a claim of breach of representation and warranty. SPA § 8.06. Section 8.02, however, specifically carves out certain limitations of the indemnity obligations of the parties including:

Except with respect to Losses resulting from a breach of the representations and warranties contained in Section 2.14, Parents shall have no indemnity obligations under Article V or Article VII for Losses to the extent that such Losses (1) are reflected as a liability of the Company or any Subsidiary on the Latest Balance Sheet or (2) are reflected as a liability in the calculation of Final Net Working Capital as determined pursuant to Section 1.04.¹

SPA § 8.02(c)(vii). A “Loss” is defined as “any and all damages, Liabilities, costs and expenses (including attorneys' fees).” SPA § 9.01. Thus, under Article VIII, a party is entitled to be indemnified if it suffers, incurs or sustains a Loss, subject to certain limitations.

On March 31, 2011, the parties closed the transaction, effective as of 12:01 a.m. of that day. Prior to closing, as required by Section 1.04(a)(i) of the SPA, Severstal delivered the Estimated Closing Statement to RG Steel,...