Industrial Opportunity Partners, L.P. v. Kendrion FAS Controls Holding GmbH
Filing
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ENTER MEMORANDUM OPINION AND ORDER: For the reasons explained, the Court grants Kendrion's motion to stay 2 and IOP's motion for leave to file a surreply 22 . The parties are directed to provide the Court with a joint status report w ithin 14 days of the completion of Deloittes "Adjustment Report" that (1) summarizes (and attaches) the end product of Deloitte's work and (2) addresses how they believe this case should move forward. Signed by the Honorable Robert M. Dow, Jr on 11/1/2013. Mailed notice(tbk, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
INDUSTRIAL OPPORTUNITY
PARTNERS, L.P.,
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Plaintiff,
v.
KENDRION FAS CONTROLS
HOLDING GmbH,
Defendant.
Case No. 13-cv-6622
Judge Robert M. Dow, Jr.
MEMORANDUM OPINION AND ORDER
This matter is before the Court on Defendant Kendrion FAS Controls Holding GmbH’s
(“Kendrion”) motion to stay proceedings in federal court pending the disposition by an
independent accounting firm chosen by Kendrion and Plaintiff Industrial Opportunity Partners,
L.P. (“IOP”) to resolve certain disputed matters involving a term of art in the accounting industry
known as “EBITDA,” which stands for “earnings before interest, taxes, depreciation, and
amortization.” [2]. The Court allowed the parties to file oversized briefs to present the issues
relating to the stay motion. See [5]. IOP additionally has moved for leave to file a surreply [22],
which Kendrion opposes [24]. The Court concludes that a stay during the relatively short
anticipated length of the proceedings on the accounting issue is warranted. Accordingly, the
motion for stay [2] is granted. 1
I.
Background
The parties generally are in agreement as to the facts underlying this suit, at least for
purposes of the instant motion. IOP entered into a stock purchase agreement with Kendrion
1
The Court has considered both IOP’s surreply and Kendrion’s response; accordingly, IOP’s motion for
leave to file a surreply [22] is granted.
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pursuant to which IOP sold a company, FAS Controls, to Kendrion. The purchase price was set
at $39 million, plus or minus certain adjustments to be made after the deal’s closing. One of the
adjustments, called an “earnout payment,” required Kendrion to pay IOP three dollars for each
dollar that FAS Controls’s pro forma EBITDA exceeded $6 million in fiscal year 2012.
Kendrion was responsible for calculating the pro forma EBITDA in the first instance and came
up with a figure of $5.466 million – less than the $6 million threshold that would obligate it pay
more money to IOP.
IOP disagreed with Kendrion’s calculations and engaged its own
accountant to calculate the pro forma EBITDA.
IOP’s accountant calculated a pro forma
EBITDA of $6.747 million, which would entitle IOP to a substantial upward adjustment in
purchase price under the stock purchase agreement. The lion’s share of the difference – some
$879,000 – was attributed to “potential price increases,” which appear to be the difference
between FAS Controls’s projected price increases and those actually implemented by Kendrion
in fiscal year 2012. IOP’s accountant noted that it lacked “adequate basis to determine” whether
Kendrion “used all ‘commercially reasonable efforts’ to implement price increases,” [11] Ex. C
at 29, but nonetheless proposed the $879,000 upward adjustment after “inquir[ing] of
management regarding efforts to pursue specific price increases in FY12” and “compar[ing]
average actual unit prices to the planned AOP FY12 unit price.” Id. at 45.
IOP provided Kendrion written notice of its objections and revised calculation, which
incorporated its accountant’s report. [11] Ex. D. at 1; [9] at 7; [20] at 16 n.9. IOP objected “to
the computation of Pro Forma EBITDA as calculated by Kendrion (the ‘Buyer’) and its auditors
Grant Thornton as set forth in the Earnout Statement.” [11] Ex. D at 1. Kendrion rejected IOP’s
calculations “in full” via an informal e-mail. Id. Ex. E.
IOP subsequently filed the instant lawsuit against Kendrion. In its two-count complaint,
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IOP alleges that Kendrion should indemnify it for breaching two covenants of the parties’ stock
purchase agreement (Count I) and seeks a declaratory judgment that its indemnification claims
are properly resolved by the Court (Count II). The two covenants that Kendrion allegedly
breached are in section 1.7(e) of the stock purchase agreement: “Buyer shall act in good faith and
the spirit of fair dealing such that the intent of this Section 1.7 [the section providing for the
adjustment based on EBITDA] is carried out to the fullest extent practicable,” and “Buyer Parent
and Buyer shall use commercially reasonable efforts to implement price increases during the
Company’s fiscal year 2012 in the aggregate that are not less than those contemplated by the
Company’s 2012 business plan.” [11] Ex. A § 1.7(e). Essentially, IOP alleges that Kendrion did
not use its best efforts to implement price increases and consequently deprived IOP of an earnout
payment that it otherwise would have been due.
Kendrion filed a motion to stay the litigation, pointing to provisions of the stock purchase
agreement in which the parties carved out a specific portion of any potential dispute for
resolution by accounting professionals. In particular, Kendrion argues that sections 1.4(b) & (c)
of the stock purchase agreement require certain disputes, including this one, to be submitted to
an “arbitrator,” independent accounting firm Deloitte. Sections 1.4(b) & (c) set forth a dispute
resolution procedure for matters of post-closing price adjustments; section 1.7(d) provides that
“the determination of the amount of the EBITDA for the period in question shall be resolved
following procedures set forth in Section 1.4(b) and 1.4(c), as applicable.” [11] Ex. A § 1.7(d).
Pursuant to the dispute resolution process enumerated in section 1.4, the parties first are
obligated to “endeavor in good faith to resolve by mutual agreement all matters in the Dispute
Notice,” a written notice that the aggrieved party furnishes to the other. Id. § 1.4 (b). “In the
event that the Parties are unable to resolve by mutual agreement any matter in the Dispute Notice
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within [a] 14-day period, the Buyer and the Sellers hereby agree that they shall engage Deloitte
* * * * The Sellers and the Buyer shall submit the disputed matters, as described in the Dispute
Notice, together with such arguments and supporting material as either of them choose to submit
in connection therewith, in writing” to Deloitte. Id. Deloitte then “shall determine, based solely
on presentations by the Sellers’ Representative and the Buyer, and not by independent review,
only those issues in dispute specifically set forth in the Dispute Notice and shall render a written
report to the Sellers’ Representative and the Buyer * * * in which [Deloitte] shall, after
considering all matters set forth in the Dispute Notice, determine what adjustments, if any,
should be made * * * *” Id. § 1.4(c). Deloitte in its review “(i) shall be bound to the principles
of this Section 1.4, (ii) shall limit its review to matters specifically set forth in the Dispute
Notice, and (iii) shall not assign a value to any item higher than the highest value for such item
claimed by either Party or less than the lowest value for such item claimed by either Party.” Id.
Deloitte’s report “shall be final and binding upon the Buyer and the Sellers, shall be deemed a
final arbitration award that is binding on each of the Buyer and the Sellers, and no Party shall
seek further recourse to courts, other tribunals or otherwise, other than to enforce” the report.”
Id. (emphasis added).
IOP contends that the procedures in section 1.4 should have no effect on the litigation of
its claims because it is seeking indemnification and not merely disputing the calculation of the
pro forma EBITDA. Specifically, IOP points to section 7.2 of the stock purchase agreement,
pursuant to which Kendrion (the Buyer) agreed to indemnify and hold harmless IOP (the Seller)
for any damages resulting from “(a) Breach of any representation or warranty of the Buyer
contained in this Agreement or (b) Breach of any covenant or agreement of the Buyer contained
in this
Agreement.”
IOP claims that Kendrion should indemnify IOP for breaching its
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agreements to “act in good faith and the spirit of fair dealing” and to exercise “commercially
reasonable efforts to implement price increases during the Company’s fiscal year 2012.”
Because these allegations do not fall within the narrow scope of a dispute over the mechanical
calculation of the pro forma EBITDA – which IOP concedes that Deloitte is authorized to
resolve, see [9] at 3 – IOP contends that section 11.16 of the stock purchase agreement should
govern. In that provision, the parties agreed that “any action or proceeding arising out of or in
connection with this Agreement shall be brought only in a federal court sitting in the city of
Chicago, Illinois (the ‘Chicago Courts’)” and consented “to submit to the exclusive jurisdiction
of the Chicago Courts for purposes of any action or proceeding arising out of or in connection
with this Agreement.” [11] Ex. A § 11.16(a). Nothing in section 11.16 or any other section of
the stock purchase agreement requires or authorizes the parties to submit their disputes to
Deloitte or any other arbitrator; IOP’s representation that the word “arbitration” appears only
once in the stock purchase agreement – in the emphasized language excerpted above – appears to
be accurate.
II.
Discussion
“The division of labor between courts and arbitrators is a perennial question in cases
involving arbitration clauses.” Janiga v. Questar Capital Corp., 615 F.3d 735, 741 (7th Cir.
2010). It is the sole question properly presented to the Court at this juncture of the case, even
though the document at issue does not contain a typical arbitration clause. IOP wants the Court
to resolve its indemnification claims 2 either simultaneously with or prior to Deloitte’s resolution
of the parties’ disputes over the calculation of the pro forma EBITDA. See [9] at 3, 19.
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IOP also mentions in its briefing that it would like the Court to issue a dispositive ruling as to Count II
of its complaint, namely that its indemnification claims must be resolved by the Court. See [9] at 3, 19.
IOP has not sought this relief in a motion or any other appropriate vehicle. The Court accordingly
declines to issue a dispositive ruling at this time.
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Kendrion takes the position that Deloitte “should decide whether to resolve the price increase
question as part of the earnout arbitration.” [2] ¶ 3. Kendrion wants the Court to, “[a]t a
minimum * * * stay this matter pending the outcome of the arbitration” because “Deloitte may
reach conclusions about issues in the Dispute Notice that IOP prepared * * *, including price
increases.” Id. ¶ 4.
Title 9, section 2 of the United States Code (section 2 of the Federal Arbitration Act)
provides, in pertinent part, that:
A written provision in any * * * contract evidencing a transaction involving
commerce to settle by arbitration a controversy thereafter arising out of such
contract or transaction * * * shall be valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity for the revocation of any contract.
9 U.S.C. § 2. This provision embodies both a “liberal federal policy favoring arbitration and the
fundamental principle that arbitration is a matter of contract.” AT&T Mobility LLC v.
Concepcion, --- U.S. ----, 131 S.Ct. 1740, 1745 (2011) (citations and internal quotation marks
omitted). But because arbitration is a matter of contract, “a party cannot be required to submit to
arbitration any dispute which he has not agreed so to submit.”
Howsam v. Dean Witter
Reynolds, Inc., 537 U.S. 79, 83 (2002); see also Volkswagen of Am., Inc. v. Sud’s of Peoria, Inc.,
474 F.3d 966, 970 (7th Cir. 2007) (“‘[A]rbitration under the Act is a matter of consent, not
coercion and the parties are generally free to structure their arbitration agreements as they see fit’
and ‘may limit by contract the issues which they will arbitrate.’” (quoting Volt Info. Scis., Inc. v.
Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989))). “[T]he federal policy is
simply to ensure the enforceability, according to their terms, of private agreements to arbitrate.”
Volkswagen, 474 F.3d at 970 (quoting Volt, 489 U.S. at 476).
To advance this policy, the Federal Arbitration Act provides for stays of litigation in
federal district courts when an issue in the case is referable to arbitration, 9 U.S.C. § 3, and for
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orders compelling arbitration when one party has failed, neglected, or refused to comply with an
arbitration agreement, 9 U.S.C. § 4. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25
(1991). Courts also may stay litigation of non-referable issues if allowing them to proceed “risks
‘inconsistent rulings’ because the pending arbitration is ‘likely to resolve issues material to [the]
lawsuit.’” Volkswagen, 474 F.3d at 972 (quoting AgGrow Oils, L.L.C. v. Nat’l Union Fire Ins.
Co. of Pittsburgh, 242 F.3d 777, 783 (8th Cir. 2001)). “The factors that bear on this inquiry
include ‘the risk of inconsistent rulings, the extent to which parties will be bound by the
arbitrators’ decision, and the prejudice that may result from delays.” Id. (quoting AgGrow, 242
F.3d at 783). “When these factors weigh in favor of staying the entire action pending arbitration,
the district court may abuse its discretion in allowing the nonarbitrable issues to proceed absent a
stay. In many instances, moreover, district courts actually may prefer to stay the balance of the
case in the hope that the arbitration might help resolve, or at least shed some light on, the issues
remaining in federal court.” Id.
Here, there is no motion to compel arbitration, presumably because the parties agree that
the calculation of the pro forma EBITDA is a “referable” or “arbitrable” issue. Based on the
representations in the parties’ briefs, see [9] at 18; [20] at 2 n.3; [22-1] at 9, the Court expects
that the parties already have engaged Deloitte or will be doing so in the very near future. The
question for the Court is whether the dispute over the reasonableness of Kendrion’s efforts to
implement price increases should be stayed in the meantime. (IOP suggests that the Deloitte
proceeding should be stayed pending the litigation, see [9] at 3, 19, but does not make any
argument as to why or on what basis the Court should take that course.) The parties invite the
Court to determine whether IOP’s claims are “arbitrable,” but the Court need not do so at this
preliminary juncture. Even if the dispute is not an “arbitrable” one requiring a stay, the Court
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concludes that a stay is proper because it is highly likely that “the arbitration might help resolve,
or at least shed some light on, the issues remaining in federal court.” Volkswagen, 474 F.3d at
972.
The stock purchase agreement reflects the parties’ reasonable conclusion that an
accounting firm is better situated than a federal court to expeditiously resolve disputes pertaining
solely to accounting computations. The claims in this suit are potentially more robust, but
Deloitte’s binding and final determination of which items – and what amounts –properly may be
considered in the pro forma EBITDA is likely to inform (and perhaps even resolve) issues
material to the lawsuit. See [11] Ex. A § 1.4(c). If, for instance, Deloitte concludes that
projected price increases are not properly considered in the EBITDA calculation, or that they
may be considered but only in an amount significantly below the $879,000 proposed by IOP, the
damages available to IOP in this action may be substantially reduced. At a minimum, Deloitte’s
resolution of the underlying accounting issues will crystallize the remaining dispute for the
parties and the Court.
IOP has not indicated, aside from alluding to “inadvertent spoliation of evidence by third
parties” in the concluding paragraph of its surreply, [22-1] at 9, how (or even if) it will be
prejudiced if the Court stays this action until the conclusion “by year end” of Deloitte’s
“expedited process regarding disputes over the calculation of the Pro Forma EBITDA
Statement,” [9] at 18. If the anticipated timeframe for Deloitte’s determination holds, any delay
in moving this case forward will be relatively minimal in the grand scheme of federal litigation –
delaying by perhaps a month or two IOP’s expressed goals of proceeding with a Rule 26(f)
conference and commencing written discovery by December 1. And waiting for that process to
unfold may enable to parties to better focus their discovery efforts once they do get underway.
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Once Deloitte’s work concludes, the parties should be expected – with the assistance and
supervision of a Magistrate Judge, if necessary – to make up for any lost time by promptly
commencing and moving forward with this litigation once the stay has been lifted. Although the
risk of inconsistent rulings if this action moves forward during Deloitte’s expedited arithmetical
review appears low (and thus militates to some extent against a stay), the binding nature of
Deloitte’s conclusions and absence of prejudice to either party from the short expected delay
convince the Court that the prudent course is to stay the instant proceedings pending Deloitte’s
determination of the limited and specialized issue that the parties have assigned to it.
III.
Conclusion
For the reasons explained above, the Court grants Kendrion’s motion to stay [2] and
IOP’s motion for leave to file a surreply [22]. The parties are directed to provide the Court with
a joint status report within 14 days of the completion of Deloitte’s “Adjustment Report” that (1)
summarizes (and attaches) the end product of Deloitte’s work and (2) addresses how they believe
this case should move forward.
Dated: November 1, 2013
____________________________
Robert M. Dow, Jr.
United States District Judge
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