Katal v. Integrated Products and
Services
Filed 2/8/13 Katal v. Integrated Products and Services
CA2/5
Received for posting 4/2/13
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND
APPELLATE DISTRICT
DIVISION
FIVE
SIAMAK KATAL et al.,
Plaintiffs and Appellants,
v.
INTEGRATED PRODUCTS AND
SERVICES INC. et al.,
Defendants and Respondents.
B236288
(Los Angeles
County
Super. Ct.
No. BC424791)
APPEAL from
a judgment of the Superior Court
of
County, Michael L. Stern and James C. Chalfant, Judges. Affirmed.
Valle Makoff,
Jeffrey T. Makoff, Ellen Ruth Fenichel; Bla Schwartz, Irwin B. Schwartz, John
V. Komar; Nagler & Associates, Lawrence Nagler, Charles Avrith for
Plaintiffs and Appellants.
Kirkland
& Elllis, C. Robert Boldt, Elizabeth M. Kim, Sasha K. Danna for Defendants
and Respondents.
I. INTRODUCTION
Plaintiffs
are the former owners of a fire and security services company. Plaintiffs sold their company to the
defendants pursuant to a purchase agreement requiring the arbitration of
disputes arising out of the agreement.
Plaintiffs
filed an action for breach of contract
claims against defendants alleging defendants failed to provide reasonable
access to accounting information related to the defendants’ claim of a post-closing
purchase price adjustment. Defendants
moved to compel arbitration. The motion
was granted. Defendants then brought
several accounting related breach of warranty claims against the plaintiffs.
The
arbitrator found in defendants’ favor and awarded them damages. Plaintiffs petitioned the trial court to
vacate or correct the award. The trial
court denied the petition, confirmed the award and entered judgment. The plaintiffs filed this appeal.
II. BACKGROUND
The Kayne
Anderson plaintiffs were shareholders of a fire and security services company,
Detection Logic Fire Protection, Inc. (“DLFPâ€) from 2005 to 2008. Mack Katal was a founder and manager of DLFP
and the Katal Revocable Trust (the “Katal Trustâ€) was his inter vivos
trust. Both Mack Katal and the Katal
Trust were shareholders in DLFP when it was sold in 2008.
Defendant
Integrated Products & Services, Inc. (“IPSâ€) purchased all of the
outstanding shares and warrants in DLFP under a Securities Purchase Agreement
(“SPAâ€) signed on December 12, 2008
with a closing effective on December
30, 2008. Defendant United
Technologies Corp. (“UTCâ€) is the parent company of IPS and a guarantor of
IPS’s SPA obligations. The purchase
price was approximately $140 million.
For ease of reference, plaintiffs will hereafter be referred to as
sellers and defendants will be referred to as buyers.
In the
complaint, the sellers alleged that the SPA set forth a formula to establish
the price due the sellers for the DLFP shares, which price was subject to a
working capital adjustment based on changes in DLFP’s financial condition in
the fourth quarter of 2008 as reflected on a final closing balance sheet and a
statement of working capital. Basically,
if DLFP’s working capital decreased in the fourth quarter of 2008, the purchase
price would be reduced. If the working
capital increased, the purchase price would increase. Sellers assert claims against buyers for
breach of contract based on the buyers’ alleged failure to deliver final and
complete closing working documents thereby waiving rights to the working
capital purchase price adjustment and for breach of the implied
based on buyers’ failure to provide sellers access to documents and information
relevant to the closing working documents.
Buyers
claimed that sellers sold DLFP to buyers for approximately $140 million, a
price paid by buyers based on a multiple of 8.7 times DLFP’s earnings for the
period beginning January 1, 2008
and ending September 30, 2008. Sellers represented the September financials
to be correct and complete in all material respects and to be presented in
accordance with Generally Accepted Accounting Principals (“GAAPâ€).
Buyers also
contended that when buyers acquired DLFP, they not only expected the company to
earn income at the rate reflected in the September income statement but also
expected that DLFP would have roughly $24.5 million in net current assets on
its balance sheet as of December 30, 2008.
Buyers
claimed that after the purchase was completed, they discovered that DLFP’s
financial statements, which formed the basis for the purchase price for the
sale were inaccurate and overstated earnings.
Buyers sought to recover the excess amount it paid for DLFP based on
overstated and inaccurate financial statements.
Buyers asserted claims against the sellers for breach of contract
arising from the representations and warranties in the SPA about DLFP’s
financial statement and for fraud in the inducement of the SPA based on alleged
misrepresentations and omissions concerning DLFP’s financial statements and
earnings. Relying on the arbitration
provision in the SPA, buyers filed a petition
to compel arbitration and a motion to stay the case pending the outcome of
the arbitration.
The SPA’s
arbitration provision stated in part:
“12.13 Dispute Resolution.
All claims, controversies or disputes arising under or in connection
with this Agreement, whether sounding in contract or tort, including
arbitrability and any claim that this Agreement was induced by fraud, but not
including claims or disputes arising under Article 2 hereof (‘Covered
Claims’) shall be resolved by binding arbitration in Los Angeles, California in
accordance with the following terms and conditions: [¶]
(a) Administrator. The
arbitration of all Covered Claims will be administered by the Los Angeles
offices of JAMS (the ‘Arbitration Administrator’). [¶]
(b) Procedural Law. Except as otherwise provided herein, the
arbitration of all Covered Claims will be governed by California procedural law
(including the Code of Civil Procedure, Civil Code, Evidence Code and Rules of
court (excluding local rules) as if the Covered Claims had been brought in a
Superior Court of the State of California; provided, however that
(i) the parties waive any right to jury; (ii) there shall be no interlocutory
appellate relief (such as writs) available; and (iii) discovery will be limited
to matters which are directly relevant to the issues in the arbitration.). [¶]
(c) Arbitrator. The arbitration shall be conducted by a
single, neutral arbitrator (‘Arbitrator’) who shall be a retired judge in the
Los Angeles office of the Judicial Arbitration and Mediation Service (‘JAMS’)
to be selected as follows: . . . . [¶]
(i) Jurisdiction/Venue/Enforcement
of Award. The Parties consent and
submit to the exclusive personal jurisdiction and venue of the Superior Court
and the Federal District Court, located in the County of Los Angeles, State of
California, to compel arbitration of Covered Claims in accordance with this
Agreement, to enforce any arbitration award granted pursuant to this Agreement,
including, but not liability to, any award granting equitable or injunctive
relief, and to otherwise enforce this Agreement and carry out the intentions of
the Parties to resolve all Covered Claims through arbitration.â€
The SPA
further provided “12.12 Governing Law.
This Agreement and any disputes hereunder shall be governed by and
construed in accordance with the internal laws of the State of California
without giving effect to any choice or conflict of law provision or rule
(whether of the State of California or any other jurisdiction) that would cause
the application of laws of any jurisdiction other than those of the State of
California.â€
Article 2
of the SPA described the working capital adjustment and procedure for resolving
disputes between buyers’ and sellers’ respective calculations of working capital. Working capital adjustment was a computation
of current assets and current liabilities on the company’s balance sheet as of
December 30, 2008. The SPA set forth
specific accounting matters and items to be included in the calculation of
DLFP’s working capital. If the company’s
working capital on the closing balance sheet exceeded an agreed upon
$24,548,628.63 amount of target working capital, then buyers would pay the
difference to sellers. If closing
working capital was less than $24,548,628.63, then sellers would pay the
difference to the buyers.
Buyers were
to prepare a closing working capital analysis calculated as of December 30,
2008 and to provide it to sellers by March 30, 2009. The SPA gave sellers access to information in
control of DLFP and buyers to investigate buyers’ closing working capital
calculations. After investigating,
sellers were to notify buyers of any dispute about the closing working capital
and to provide the dollar amount of each disagreement and supporting
documentation.
If the
parties were unable to resolve the closing working capital disputes, the SPA
provided a mechanism to resolve the disagreement. Article 2.2(b) of the SPA provided “If Buyer
and the Seller Representative are unable to resolve all disagreements properly
identified by the Seller Representative pursuant to Section 2.2(a)
within thirty (30) days after delivery to the Seller Representative of written
notice of such disagreements, then such disagreements shall be submitted for
final and binding resolution to a Neutral Accounting Firm to resolve such
disagreements (the ‘Accounting Arbitrator’). . . . The Accounting Arbitrator shall only consider
the briefs and oral presentations of the parties, and shall not conduct any
independent review, in determining those items and amounts disputed by the
parties. The Accounting Arbitrator shall
select either the position of Buyer or the Seller Representative as a
resolution for each item or amount disputed and may not impose an alternative
resolution with respect to any item or amount disputed and must resolve the
matter in accordance with the terms and conditions of this Agreement. . .
. The Accounting Arbitrator shall make
its determination based solely on presentations and supporting material
provided by the parties and not pursuant to any independent review. The determination of the Accounting
Arbitrator shall be final and binding. . . .â€
On February
3, 2010, the trial court granted the buyers’ petition to compel arbitration of
all claims and motion to stay. It
ordered that “[p]ursuant to the arbitration clause in the parties’ Securities
Purchase Agreement, the entire matter is going to JAMS, including the
accounting issue to be resolved. . . .â€
The Hon. Haley Fromholz (Ret.) of JAMS was selected as the arbitrator.
On May 10,
2010, SS&G Financial Services, Inc. was appointed as a neutral accounting
firm to act as an accounting arbitrator to resolve disagreements as to proposed
working capital adjustments. The
accounting arbitration was conducted before Lewis Baum of SS&G Financial
Services, Inc. On August 10, 2010, Mr.
Baum issued a report, in which he awarded buyers a $6,082,000 purchase price
adjustment plus accrued interest of $326,460.
From
October 11, 2010 through October 22, 2010, an arbitration hearing was conducted
by Judge Fromholz of JAMS. On July 26,
2011, he issued his final award. Judge
Fromholz found that buyers established sellers’ breach of the representation
and warranty that the financial statements attached to the SPA were correct and
complete in all material respects and were prepared and maintained according to
generally accepted accounting principles.
Buyers also established that they were entitled to damages in the amount
of $27,536,767.09 which represents the difference between what they paid and
the fair market value of DLFP at the time of the sale. He further found that buyers were entitled to
interest on that amount. Judge Fromholz
also found that sellers did not establish a breach of the SPA for buyers
providing late and inaccurate closing working capital documents. He further found that sellers did not
establish a breach of the SPA based on buyers’ alleged refusal to give full
access to DLFP books and personnel in connection with the accounting
arbitration.
Sellers filed
a petition to vacate or correct the arbitration award issued by Judge
Fromholz. They did not file a petition
to vacate or correct the accounting arbitration award issued by Lewis Baum. On August 24, 2011, the trial court denied
the sellers’ petition and confirmed the
arbitration awards of Judge Fromholz and of Lewis Baum. The trial court entered judgment. The sellers appealed.
III. DISCUSSION
The parties
in this case submitted their dispute to arbitrators pursuant to the SPA which
was their written agreement. “The
principles governing review of an arbitration award are well established. An arbitration award is final and conclusive
because the parties–as here– ‘have agreed that it be so.’ [Citation.]
Only limited judicial review is available; courts may not review the
merits of the controversy, the validity of the arbitrator’s reasoning, or the
sufficiency of the evidence supporting the award. [Citation.]
Thus with ‘narrow exceptions,’ an arbitrator’s decision is not
reviewable for errors of fact or law.
[Citation.] This is so even if
the error appears on the face of the award and causes substantial
injustice. [Citation.]†(Shahinian
v. Cedars-Sinai Medical Center (2011) 194 Cal.App.4th 987, 999-1000.)
Under the
California Arbitration Act, the grounds for vacating an arbitration award are
stated in Code of Civil Procedure section 1286.2. One of those grounds — the one asserted by
the sellers — requires the court to vacate an arbitration award if the court
determines “The arbitrators exceeded their powers and the award cannot be
corrected without affecting the merits of the decision upon the controversy
submitted.†(§1286.2, subd. (a)(4)).
Sellers
contend that Judge Fromholz exceeded his powers when: (1) he decided buyers’ fraud/breach of
warranty claims under Delaware law, contrary to the SPA’s express California
law selection; (2) he awarded buyers a $6,082,000 double recovery in violation
of the SPA’s express prohibition; (3) he awarded buyers a prohibited “double
dip†indemnification award on working capital items; and (4) he failed to
decide the access issue.
An
arbitrator exceeds his powers by acting without subject matter jurisdiction,
deciding an issue that was not submitted to arbitration, arbitrarily remaking
the contract, upholding an illegal contract, issuing an award that violates a
well-defined public policy or a statutory right, fashioning a remedy that is
not rationally related to the contract, or selecting a remedy not authorized by
law. (Jordan v. Department of Motor Vehicles (2002) 100 Cal.App.4th 431,
443.) None of these circumstances exist
in this case.
Sellers
contend that Judge Fromholz did not apply California law. The language in the SPA stated that “This
Agreement and any disputes hereunder shall be governed by and construed in
accordance with the internal laws of the State of California. . . .†We need not make any determination whether
the arbitrator did or did not apply California law in resolving this claim. In Gravillis
v. Coldwell Banker Residential Brokerage Co. (2010) 182 Cal.App.4th 503,
519 the court stated “We now make it explicit:
Neither ‘apply’ nor ‘in accordance with,’ when used in an arbitration
provision to identify the governing substantive law, evinces an agreement that
an award be reviewed for legal error.â€
As to the
sellers’ other contentions of error by the arbitrator, there is no explicit
reference in the SPA to a broadened scope of judicial review of the arbitration
award. “A provision requiring
arbitrators to apply the law leaves open the possibility that they are
empowered to apply it ‘wrongly as well as rightly.’ [Citations.]
As we recently observed: ‘When
parties contract to resolve their disputes by private arbitration, their
agreement ordinarily contemplates that the arbitrator will have the power to
decide any question of contract interpretation, historical fact or general law
necessary, in the arbitrator’s understanding of the case, to reach a
decision. [Citations.] Inherent in that power is the possibility the
arbitrator may err in deciding some aspect of the case. Arbitrators do not ordinarily exceed their
contractually created powers simply by reaching an erroneous conclusion on a
contested issue of law or fact, and arbitral awards may not ordinarily be
vacated because of such error for “‘[t]he arbitrator’s resolution of these
issues is what the parties bargained for in the arbitration agreement.’†[Citation.]’
[¶] Therefore, to take themselves
out of the general rule that the merits of the award are not subject to
judicial review, the parties must clearly agree that legal errors are an excess
of arbitral authority that is reviewable by the courts. . . . [W]e emphasize that parties seeking to allow
judicial review of the merits, and to avoid an additional dispute over the
scope of review, would be well advised to provide for that review explicitly
and unambiguously. [Citation.]†(
(2008) 44 Cal.4th 1334, 1360-1361.)
The
language of the SPA is direct and unambiguous.
Article 2.2(b) states “The determination of the Accounting Arbitrator
shall be final and
under or in connection with this Agreement, whether sounding in contract or
tort, including arbitrability and any claim that this Agreement was induced by
fraud, but not including claims or disputes arising under Article 2
hereof (‘Covered Claims’) shall be resolved by binding ARBITRATION in Los Angeles, California . . .†(emphasis added.) There are no provisions providing for
judicial review. The parties negotiated
the SPA which provided the mechanism for dispute resolution. The parties bargained for binding arbitration
to resolve any disputes that they may have had.
We conclude
that the trial court properly denied the petition to vacate or correct the
award, granted the petition to confirm the award, and entered judgment in favor
of the buyers.
>
IV. DISPOSITION
The
judgment is affirmed. The parties are to
bear their own costs on appeal.
NOT TO BE
PUBLISHED IN THE OFFICIAL REPORTS
FERNS,
J.
We concur:
TURNER,
P. J.
KRIEGLER,
J.
Court, assigned by the Chief Justice pursuant to article VI, section 6 of the
California Constitution.
