Mooney, et al. v. Diversified Business Communications, et al. (Lawyers Weekly No. 09-014-18)
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1684CV03726-BLS2
1784CV03423-BLS2
____________________
JOHN J. MOONEY, MORGAN WHEELOCK, JOHN SQUIRE, and MACGREGOR INVESTMENTS CORPORATION
v.
DIVERSIFIED BUSINESS COMMUNICATIONS; DBC PRI-MED, LLC; THEODORE WIRTH; KATHY WILLING; and OAKLEY DYER
____________________
MEMORANDUM AND ORDER ALLOWING CERTAIN DEFENDANTS’ MOTION TO COMPEL APPRAISAL
The four plaintiffs were minority owners of defendant DBC Pri-Med LLC, which is a Delaware limited liability company. Defendant Diversified Business Communications is the majority member of Pri-Med. In January 2017 Pri-Med called all of Plaintiffs’ membership shares, as expressly permitted in § 13.1(a) of Pri-Med’s operating agreement. This LLC Agreement provided for an appraisal firm to be by the parties to determine the value of any called (or put) shares. That appraisal process has not yet begun because Plaintiffs have refused to agree upon an appraisal firm.
Pri-Med and Diversified have moved for specific performance of the third-party appraisal provision. Plaintiffs John Mooney and Morgan Wheelock filed a written response stating that they “have no objection to an independent appraisal,” but asking the Court to establish a new process under which a special master would select the appraiser and schedule (and perhaps conduct) evidentiary hearings before the appraiser. Plaintiffs John Squire and Macgregor Investments Corporation filed a written response joining in the arguments by the Mooney Plaintiffs. At oral argument, however, the Squire Plaintiffs suddenly reversed course and asserted for the first time that no appraisal should be conducted, either ever or for now.
Defendants have the better of these arguments. Under Delaware law Defendants are entitled to enforce the contractual appraisal process, subject only to limited judicial review of the appraiser’s final decision. It would be inappropriate for the Court to arrogate to a special master the power to select the appraisal firm or to schedule or conduct hearings. The Court will ALLOW the motion to compel.
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The Court must apply Delaware law in deciding this motion. The parties agreed in § 15.5 of the LLC Agreement that this contract “shall be construed and enforced in accordance with the laws … of the State of Delaware.” The provision is enforceable. See Hodas v. Morin, 442 Mass. 544, 549–550 (2004) (“As a rule, ‘[w]here the parties have expressed a specific intent as to the governing law, Massachusetts courts will uphold the parties’ choice as long as the result is not contrary to public policy.’ ”) (quoting Steranko v. Inforex, Inc., 5 Mass. App. Ct. 253, 260 (1977).
The appraisal provision of the LLC Agreement that Pri-Med and Diversified seek to enforce states as follows:
In the event that the Company [i.e., DBC Pri-Med LLC] and the selling Employee Member fail to agree on a price for the selling Employee Member’s Shares on or before the thirtieth (30th) day following the delivery and receipt of the Put or Call Notice, as applicable, the selling Employee Member’s Shares shall be appraised by a mutually agreeable, independent, certified, business valuation and appraisal firm (the “Appraisal Firm”), whose fees and expenses shall be shared equally between the Company and the selling Employee Member. The valuation of the subject Shares shall be based on a valuation of the Company as a going concern and shall not be discounted for the illiquidity or minority nature of such Shares. The Appraisal Firm shall be instructed to deliver its appraisal report within sixty (60) days of the engagement. The Appraisal Firm’s appraisal of the value of the subject Shares shall be final and binding on the parties as the Redemption Price.
No party has suggested that this provision is ambiguous, or sought to offer any extrinsic evidence regarding its meaning.
Under the schedule established in this contractual provision, the appraisal process should have begun a year ago and finished a few months after that. Pri-Med delivered its call notices in early January 2017. The parties did not agree upon a redemption price within thirty days. Both sides had an obligation to select a mutually agreeable appraisal firm and to instruct that firm to deliver its final appraisal report within sixty days after its formal engagement. It is undisputed that Plaintiffs have not agreed to any of the appraisal firms proposed by Defendants or proposed an alternative. They refuse to do so unless and until there is judicial oversight of the appraisal process.
The Court does not believe it would be appropriate for it to appoint a special master and oversee the appraisal process. Doing so would be inconsistent with the
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terms of the LLC Agreement and inconsistent with the governing Delaware law. To the extent that the Court has the discretion under Delaware law to appoint a special master and take control of the appraisal process, it declines to do so.
Plaintiffs are contractually bound to allow an agreed-upon appraisal firm determine the value of Pri-Med and thus the value of their shares. Under Delaware law, a contractual agreement to resolve valuation disputes through a final and binding appraisal process, where invoked (as here), “provide[s] mandatory form of arbitration, precluding recourse to the courts.” Closser v. Penn Mutual Insurance Co., 457 A.2d 1081, 1087 (Del. 1983) (emphasis added). A party’s unwillingness “to proceed with the appraisal process does not entitle him to seek recourse in the courts instead.” Nahill v. Raytheon Co., 84 Mass. App. Ct. 1129, 2014 WL 183961, *3 (2014) (unpublished opinion) (applying Closser and Delaware law).
The appraisal provision of the contract is silent regarding what process the appraisal firm should follow to obtain information and argument from the parties. This means that the parties are free to agree upon a particular process when they retain the appraisal form. In the absence of such agreement, the contract implicitly authorizes the appraisal firm to establish a fair and appropriate process, without judicial oversight. See Prettinaro Const. Co., Inc. v. Harry C. Partridge, Jr., & Sons, Inc., 408 A.2d 957, 963 (Del. 1979) (where dispute is subject to arbitration, substantive and procedural disputes should all be decided by the arbitrator, not by a court); LG Electronics, Inc. v. InterDigital Communications, Inc., 98 A.2d 135, 140 (Del. Ch. 2014) (Laster, Vice C.) (same).
The Mooney Plaintiffs are asking the Court to get involved in the appraisal process in a manner that seems inconsistent with the appraisal provision that the parties agreed to in their LLC Agreement. “When parties bargain to have a contractual payment turn on the on the valuation of [a business or some] property, the parties are free to set whatever level of judicial review” and other judicial involvement “they like.” Senior Housing Capital, LLC v. SHP Senior Housing Fund, LLC, C.A. No. 4586-CS, 2013 WL 1955012, *26 (Del. Ch. 2013) (Strine, C.). In this case the parties agreed that they would select an appraiser, and that the appraiser’s valuation of Pri-Med “shall be final and binding on the parties as the Redemption
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Price.” Under Delaware law, that leaves very little room for judicial involvement in the appraisal process or result.
Judicial review of the appraiser’s final decision is quite limited under a contract like this. Where the parties have agreed that an appraiser will determine the value of a business or property, to be used as an input in determining what one party is to be paid, “there is no judicial review if no provision for such review is provided in the contract itself.” Id. *24. “When a contract plainly says that a contractual input (the value of a certain [business or] property) will be determined by an appraiser selected in accordance with the contract’s terms, that is what it plainly means. It is contrary to such a plain reading for the appraiser’s value to be subject to judicial second-guessing.” Id.
The only exception arises if an aggrieved party believes that the appraiser’s final decision has been unfairly tainted in some way, for example because one side provided the appraiser “with false financial statements;” in such a case the aggrieved party may assert a claim that the other side “had breached the contract’s implied covenant of good faith and fair dealing.” Id. at *26. “Thus, judicial review is not unavailable, but is restricted to considering a claim that the appraisal is unworthy of respect because it does not, as a result of contractual wrongdoing, represent the genuine impartial judgment on value that the contract contemplates.” Id. That sort of limited challenge to a final appraisal is only available, by definition, after the appraisal is complete—as the additional cases cited by the Mooney Plaintiffs make clear. See PECO Logistics, LLC v. Walnut Investment Partners, L.P., C.A. No. 9978-CB, 2015 WL 9488429, *11 (Del. Ch. 2015) (Bouchard, C.); JPMorgan Chase & Co. v. Am. Century Cos. Inc., C.A. No. 6875-VCN, 2012 WL 1524981, *8 (Dec. Ch. 2012) (Noble, Vice C.).
Since the parties opted by contract to leave it up to an appraiser chosen by the parties to decide the value of Pri-Med, and therefore the value of any redeemed shares, it would be inappropriate for the Court to arrogate to itself or to a special master the selection the appraisal firm or the manner in which information and argument is presented to the appraiser. The Plaintiffs need to comply with their obligation to help choose an appraisal firm. And the Court is going to order them to
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do so. Plaintiffs may not condition their participation on a material alteration of the appraisal provision they agreed to as part of their contract.
The Mooney Plaintiffs’ observation that historically Delaware courts sometimes appointed special masters to assist with or even to conduct statutory appraisal proceedings in court is unavailing for several reasons.1 The Mooney Plaintiffs point to Cinerama, Inc. v. Technicolor, Inc., No. 7129, 1999 WL 135242, *1 (Del. Ch. 1999) (Chandler, C.), in which the Delaware Court of Chancery declined to reconsider its order appointing a special master to hear a statutory appraisal proceeding. But the prior appointment order was reversed by the Delaware Supreme Court, which held that “[i]n the specific context of a statutory appraisal proceeding, we now conclude that the Court of Chancery’s authority to appoint a special appraiser has been eliminated by statute.” See Cede & Co. v. Technicolor, Inc., 758 A.2d 485, 493 (Del. 2000). Since Cinerama was reversed on appeal, it hardly supports the Mooney Plaintiffs’ position.
In any case, the ability of courts to use special masters in their own proceedings has nothing to do with the contractual delegation of an appraisal to a private appraisal firm, as the parties agreed to do in this case. When the parties entered into their LLC Agreement, they “specifically anticipated and expressly provided for the possibility of a dispute about valuation. The Court’s obligation is to enforce the procedure to which the parties agreed.” Nahill v. Raytheon Co., No. Suffolk Sup. Ct. no. 2006-03883-BLS2, 2009 WL 909813, *4 (Mass. Super. Ct. 2008) (Fabricant, J.), aff’d, 84 Mass. App. Ct. 1129 (2014).
The Court declines to consider the additional arguments that the Squire Plaintiffs raised for the first time at oral argument. It considers those arguments as having been waived, for several reasons.
1 “[T]he merger provisions of the Delaware General Corporation Law permit the majority stockholders to ‘cash-out’ the minority stockholders. If the minority stockholders are ‘cashed-out,’ one way that the Delaware General Corporation Law protects such stockholders is by providing them with the statutory remedy of appraisal.” Jay W. Eisenhofer & John L. Reed, Valuation Litigation, 22 Del. J. Corp. L. 37, 40–41 (1997) (citations omitted). Such a statutory appraisal is conducted by the Court of Chancery. See 8 Del. Code § 262.
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First, these new arguments were never presented in the written memoranda filed or adopted by the Squire Plaintiffs. In the Superior Court, a party that opposes a written motion is required to submit a memorandum that includes “a statement of reasons, with supporting authorities, why the motion should not be allowed[.]” Sup. Ct. Rule 9A(a)(2). This requirement is in part an “an ‘anti-ferreting’ rule designed to assist a trial judge” in identifying what legal arguments are being pressed by each party. Cf. Dziamba v. Warner & Stackpole LLP, 56 Mass. App. Ct. 397, 399 (2002) (same as to requirement in Rule 9A(b)(5) that summary judgment motions be accompanied by joint statements of material facts). In addition, this requirement also ensures that the moving party receives proper notice of the opposing party’s arguments and thus has the opportunity to respond in a written reply memorandum, as permitted in Rule 9A(a)(3), and at any oral argument. It would be unfair to consider entirely new arguments raised by the Squire Plaintiffs for the first time at oral argument, especially arguments that contradict the position taken by the Squire Plaintiffs in their prior written submission, since Defendants have had no meaningful opportunity to respond The Court deems these arguments to be waived. Cf. Board of Reg. in Med. v. Doe, 457 Mass. 738, 743 n.12 (2010) (argument raised for first time at oral argument, in violation of rule requiring that parties’ contentions on appeal must be presented in written brief, is waived); Metro Eqpt. Corp. v. Commonwealth, 74 Mass. App. Ct. 63, 64 n.2 (2009) (same).
Second, even at oral argument the Squire Plaintiffs made only passing reference to their new arguments. They failed to explain these points in meaningful detail and failed to cite any kind of legal authority to support them. Since this “leav[es] the court unable to adequately assess their claim,” the Court exercises its discretion to deem these arguments as having been waived for this reason as well. See Commonwealth v. Johnson, 470 Mass. 300, 319 (2014) (holding that trial court judge “acted well within his discretion” in declining to consider unsupported and undeveloped argument in support of motion by criminal defendants); see also Jordan v. Superintendent, Massachusetts Correctional Institution, Cedar Junction, 53 Mass. App. Ct. 584, 587 n.6 (2002) (where party mentions statute but “fails to develop any argument” under it, claim under statute “has been effectively waived”); McCullen v. Coakley, 571 F.3d 167, 182 n.3 (1st Cir. 2009), cert. denied, 130 S.Ct. 1881 (2010)
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(“avoiding waiver requires more than a hint that a particular theory may be lurking; it necessitates some developed argumentation addressed to that particular theory”).
ORDER
The motion by defendants DBC Pri-Med LLC and Diversified Business Communications to compel the third-party appraisal procedure required under the Pri-Med operating agreement is ALLOWED. The parties shall agree upon a mutually acceptable, independent Appraisal Firm by February 21, 2018. The Appraisal Firm shall determine the procedures it wishes to follow to carry out its mandate under the parties’ written contract. See the further order compelling an independent appraisal.
February 2, 2018
___________________________
Kenneth W. Salinger
Justice of the Superior Court