In a July 24, 2014, New York County Commercial Division decision by Justice Bransten, the court denied Defendants’ motion to dismiss and granted Plaintiff’s motion to compel a valuation in connection with the purchase of two companies in the automation instrumentation and controls industry (the “Automation Companies”).
Plaintiff’s breach of contract action primarily alleged that Defendants failed to disclose certain pre-closing liabilities of, and failed to jointly retain a particular accounting firm to resolve the parties’ dispute over the final purchase price for, the Automation Companies.
In a previous action brought in Delaware, two related companies owned by Defendants sued the Automation Companies for failure to make commission payments under certain termination agreements with Defendants’ related companies. The Purchase Agreement at issue in the New York action required the Automation Companies to terminate their prior commission agreements before closing. Accordingly, the Automation Companies entered into termination agreements with Defendants’ related companies under which the Automation Companies allegedly failed to make approximately $1.5 million in commission payments. The Delaware court ultimately granted summary judgment in favor of Defendants’ related companies and dismissed with prejudice the Automation Companies’ fraud defense.
The allegations against the Automation Companies in the Delaware action concerning the unpaid commissions served as a basis for Plaintiff’s claims in the New York action that Defendants breached certain representations in the Purchase Agreement concerning the disclosure of pre-closing liabilities carried by the Automation Companies. Defendants, for their part, pointed to the disposition of the Delaware action as forming the basis of their motion to dismiss Plaintiff’s claim in New York on grounds of res judicata and collateral estoppel.
The Court’s Determination of Defendants’ Motion to Dismiss
Because “New York courts apply the law of the rendering jurisdiction to determine the preclusive effect of the decisions of sister states,” the court applied Delaware law in analyzing Defendants’ motion to dismiss on the basis of res judicata and collateral estoppel.
Defendants primarily argued that Plaintiff’s claim regarding Defendants’ alleged misrepresentations in the Purchase Agreement should be dismissed on the basis of res judicata and collateral estoppel because the Delaware court previously had dismissed with prejudice the Automation Companies’ fraud defense. In the Delaware action, the Automation Companies claimed in their defense that Defendants fraudulently failed to disclose the alleged commission liabilities in the Purchase Agreement.
The court rejected Defendants’ argument, in large part based on the Delaware court’s emphasis of the distinctions between the Purchase Agreement and the termination agreements. The Delaware court specifically had rejected the argument that the agreements were “interrelated,” “interchangeable,” and “part and parcel” with each other, particularly as it related to the application of the Purchase Agreement’s New York forum-selection clause. Because the Automation Companies’ fraud defense in the Delaware action was distinct from Plaintiff’s claim concerning Defendants’ breach of the representation provisions in the Purchase Agreement, which claim was in any event limited to New York under the forum selection clause, the court denied Defendants’ motion based on res judicata.
The court also noted that, despite having dismissed the defense with prejudice, the Delaware court did not make any factual determination concerning the Automation Companies’ allegations of fraud. Thus, the court found that Defendants’ argument that the false-representation issue already had been litigated was “dubious.”
The Court’s Determination of Plaintiff’s Motion to Compel
In support of its motion to compel a valuation under CPLR 7601, Plaintiff argued that in light of the parties’ overarching disagreement as to price, the Purchase Agreement expressly required the parties to retain a particular accounting firm to resolve their differences. Defendants countered that Plaintiff’s claim for breach of the representation provisions in the Purchase Agreement necessarily implicated the indemnification provisions in the Agreement, which prescribed judicial resolution in the event of disagreement among the parties.
Engaging in a detailed analysis of the apparently-competing contract provisions, the court ultimately sided with Plaintiff and compelled a valuation by the accounting firm identified in the Purchase Agreement. The court cited certain other provisions in the Agreement supporting its decision – namely, that “nothing set forth in [the indemnification provisions] shall affect any party’s rights to specific performance or other equitable remedies with respect to the covenants referred to in this Agreement.”
Because the parties’ agreement to retain the accounting firm in the event of an unresolved purchase price constituted a “covenant” as that term is “plainly and ordinarily” understood, and because CPLR 7601 provides for the remedy of specific performance, the court found that “specific performance of the remedy of valuation is available to Plaintiff here.” The court also noted the underlying policy considerations of CPLR 7601 and the practical implications of the Purchase Agreement in rendering its decision – namely, that the accounting firm’s valuation “in turn would lead to a determination which may resolve certain of the remaining issues in this litigation.”
Spectris Inc. v 1997 Milton B. Hollander Family Trust., Sup Ct, New York County, July 24, 2014, Bransten, J, Index No. 653706/13