Vale v. Valchuis
| Decision Date | 22 May 2015 |
| Docket Number | SJC–11744. |
| Parties | Michael A. VALE v. David J. VALCHUIS & another. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Euripides D. Dalmanieras (James W. Bucking with him), Boston, for New England Cleaning Services, Inc.
Robert R. Berluti (Edward F. Whitesell, Jr., with him), Boston, for the plaintiff.
Ben Robbins & Martin J. Newhouse, Boston, for New England Legal Foundation, amicus curiae, submitted a brief.
Present: GANTS, C.J., SPINA, CORDY, BOTSFORD, DUFFLY, LENK, & HINES, JJ.
CORDY
, J.
In this case we decide whether the valuation of stock, pursuant to a stock transfer restriction, is a proper subject for arbitration and, if so, whether and when a selling shareholder may terminate the arbitration process. The transfer restriction in this case required the shareholder first to offer his stock to the company at his desired price, and then, if the company rejected it, to
offer it at a price to be determined by arbitrators. The plaintiff, Michael A. Vale, invoked this process by tendering an offer to the defendant, New England Cleaning Services, Inc. (NECS). After doing so, however, he changed his mind regarding his desire to sell and sought to withdraw from the process of valuing his stock. NECS moved to compel arbitration.
A judge in the Superior Court denied the motion to compel, relying on the doctrine of Palmer v. Clark, 106 Mass. 373, 389 (1871)
, which distinguishes arbitration from appraisal. The judge concluded that a mere disagreement over the value of stock was legally insufficient to give rise to arbitration. On appeal, NECS argues that Palmer and its progeny were abrogated by G.L. c. 251, inserted by St. 1960, c. 374, § 1, as amended (Arbitration Act), which, among other things, provides that a written contract providing for the arbitration “of any existing controversy” is “valid, enforceable and irrevocable” except on grounds that exist for “the revocation of any contract.” See G.L. c. 251, § 1.
We conclude that the distinction between arbitration and appraisal remains valid, but affirm the judge's denial of the motion to compel on other grounds. A stock valuation may be conducted through arbitration, so long as an actual controversy exists regarding the value of the stock. A rejected offer to sell the stock creates such a controversy, provided that the shareholder still desires to sell the stock and the transfer restriction requires him to offer it first to the company. A shareholder may not, however, unilaterally withdraw the controversy from arbitration once it has commenced. Because the shareholder in this case decided not to sell the stock prior to the commencement of arbitration, the controversy to be arbitrated was rendered moot.2
1. Background. Vale is a fifty per cent shareholder of NECS, a Massachusetts close corporation. The only other shareholder is Vale's brother, David J. Valchuis. Vale and Valchuis formed NECS in 1977 and both remain directors of the company. In 2005, Vale and Valchuis experienced a breakdown in their business relationship, after Vale stepped down as NECS's president. On several occasions over the ensuing eight years, Vale expressed a desire to sell his NECS stock. Article 5 of NECS's articles of incorporation (Article 5) describes a discrete process that a shareholder
must follow if he desires to sell his stock.3 Vale did not invoke Article 5 during these initial discussions regarding the sale of his stock.
In June, 2013, NECS suspended shareholder distributions on the asserted grounds of increased labor costs and other expenses. In response, Vale filed a complaint against NECS and Valchuis in Superior Court, alleging breach of fiduciary duty and seeking an accounting. Vale contended in essence that the suspension of distributions was designed to force him to sell his shares at a reduced price. NECS filed a counterclaim, alleging breach of fiduciary duty and breach of contract. The basis of the breach of contract claim was Vale's failure to comply with Article 5.
In October, 2013, during the pendency of the litigation, Vale specifically invoked Article 5 in a letter sent to Valchuis in the latter's capacity as a director of NECS. In the letter, Vale offered his shares to NECS at the price of $5 million and, and as required by Article 5, named one arbitrator. Consistent with Article 5, Vale's letter also stated that “the Board of Directors must within thirty (30) days of this notice either accept this offer, or notify me in writing the name of an arbitrator selected by NECS.” On November 1, 2013, NECS declined Vale's offer and named a second arbitrator accordingly. Under the provision of Article 5, the two named arbitrators were then to select a third arbitrator for the purpose of arbitrating (or “ascertaining”) the value of the stock.
On November 8, 2013, Vale argued in his motion before the Superior Court that because he had invoked Article 5, NECS's counterclaim for breach of contract was moot. The following week, prior to the selection of the third arbitrator, Vale informed NECS that he was “no longer interested in selling his NECS stock” and that the “arbitration that has not yet commenced ... is therefore moot.” NECS responded that Vale had no power to terminate the arbitration proceedings that he commenced by invoking Article 5.
NECS filed a motion to compel Vale to arbitrate the value of his stock. The judge concluded that, notwithstanding its references to “arbitrators,” Article 5 called for a valuation proceeding in the nature of an appraisal rather than arbitration. Finding that there was no agreement to arbitrate and, therefore, that the Arbitration Act did not apply, the judge denied NECS's motion to compel arbitration. NECS filed an interlocutory appeal pursuant to G.L. c. 251, §§ 2
, 18, and we granted NECS's application for direct appellate review.
2. Discussion. The validity and scope of arbitration agreements have been governed by statute in the Commonwealth since at least 1786. See St. 1960, c. 374; St. 1925, c. 294; Rev. St. 1901, c. 194; Pub. St. 1881, c. 188; Gen. St. 1855, c. 147; Rev. St. 1835, c. 114; St. 1786, c. 21. In an early case, Fowler v. Bigelow, 8 Mass. 1, 2 (1811)
, this court construed the 1786 statute as limiting arbitration to disputes in the nature of personal actions at law and, as a result, held that an arbitrator had no jurisdiction to determine title to real estate. In 1835, the Legislature, citing Fowler, expanded the realm of arbitrable disputes to include “[a]ll controversies, which might be the subject of a personal action at law, or of a suit in equity.” Rev. St. 1835, c. 114. The question then arose whether a contractual provision calling for a valuation of property created an agreement to arbitrate.
, this court concluded that it did not, observing that a “reference to a third person to fix by his judgment the price, quantity or quality of material, to make an appraisement of property and the like, especially when such reference is one of the stipulations of a contract founded on other and good considerations, differs in many respects from an ordinary submission to arbitration.” In an appraisal, for example, “[t]he decision may be made without notice to or hearing of the parties ... and it may be made upon such principles as the person
agreed on may see fit honestly to adopt, or upon such evidence as he may choose to receive.” Id. Our subsequent cases continued to apply the doctrine of Palmer, firmly entrenching the “distinction between the arbitration of a controversy and a contract one term of which calls for the ascertainment by designated persons of values, quantities, losses or similar facts.” Franks v. Franks, 294 Mass. 262, 266, 1 N.E.2d 14 (1936)
. See Eliot v. Coulter, 322 Mass. 86, 90, 76 N.E.2d 19 (1947).
The scope of arbitrable disputes remained unchanged until the passage of the present Arbitration Act, which provides that “a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties shall be valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.” G.L. c. 251, § 1
. Notably absent from the Arbitration Act is the long-standing limitation of arbitration to actions in law and equity. NECS makes much of this omission, arguing that the Arbitration Act rendered Palmer and its progeny obsolete. We disagree.
Although NECS is correct that the Arbitration Act expanded the scope of arbitrable controversies, the fact of the matter is that a controversy actually must exist to be submitted for arbitration. The long line of cases distinguishing arbitration from appraisal was largely concerned with the absence of a controversy and other indicia of arbitration, rather than the valuation proceeding's genesis in law or equity. Thus, in Franks, 294 Mass. at 266–267, 1 N.E.2d 14
, quoting Matter of
Fletcher, 237 N.Y. 440, 451, 143 N.E. 248 (1924), we explained that the “provisions of the Arbitration Law are properly applicable to any contract where the parties have agreed to substitute for the courts an informal tribunal of their choice in the settlement of a controversy.”
Here, the motion judge ruled that Article 5 did not create a controversy and, thus, did not contain an arbitration clause. Relying on Eliot, 322 Mass. at 89, 76 N.E.2d 19
, the judge reasoned that although “[t]here may be a dispute about the value of NECS stock ... such a difference of opinion regarding value does not convert the valuation process into an arbitration determinative of the rights and liabilities of the parties.” The Eliot case does not support this proposition.
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