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CRABTREE v. TRISTAR AUTOMOTIVE GROUP

October 30, 1991

ROBERT CRABTREE, INDIVIDUALLY AND ROBERT CRABTREE, D/B/A ESTREE COMPANY, PLAINTIFFS,
v.
TRISTAR AUTOMOTIVE GROUP, INC., ARTHUR K. WATSON, JR., CHARLES H. WILK AND STUART H. WATSON, DEFENDANTS. TRISTAR AUTOMOTIVE GROUP, INC., ARTHUR K. WATSON, JR. AND STUART H. WATSON, COUNTERCLAIM PLAINTIFFS, V. ROBERT E. CRABTREE, INDIVIDUALLY AND ROBERT E. CRABTREE D/B/A ESTREE COMPANY, MARGARET J. LYSTER, CONSTANCE A. MARKEY, JOSEPH C. CRABTREE AND WILLIAM J. FOX, AS TRUSTEE OF THE JOSEPH C. CRABTREE TRUST, THE MICHAEL R. CRABTREE TRUST AND THE ROBERT E. CRABTREE, JR. TRUST, COUNTERCLAIM DEFENDANTS.



The opinion of the court was delivered by: Goettel, District Judge.

  OPINION

In 1989, the defendants in this case purchased a network of automobile dealerships from the plaintiffs. The transaction did not go smoothly and the resulting disputes have been presented to this court for resolution. The complaint tells the story of a trusting seller who, after yielding possession of his business to the buyer, was asked to pay over a large sum of money in addition. The counterclaims mirror the complaint's assertions of fraud and breach of contract, claiming that the buyer was duped into purchasing a business whose value was grossly overrepresented. The true story is yet untold. For now, this court's task is to deal with the preliminary matters that arise as this tale unfolds.

BACKGROUND

TriStar Automotive Group, Inc. ["TriStar"] was organized in 1989 by the three individual defendants, Arthur K. Watson, Jr., Charles H. Wilk and Stuart H. Watson, to purchase the assets of Crabtree Automotive, Inc. ["Crabtree Automotive"], a holding company with ten wholly owned subsidiaries operating a variety of automobile dealerships. Negotiations with plaintiff Robert Crabtree ["Crabtree"], the principal shareholder of Crabtree Automotive,*fn1 and the sole proprietor of plaintiff Estree Company,*fn2 began in May 1989 and were concluded with the execution of a Stock Purchase Agreement on June 19, 1989 which effected the sale of the capital stock of Crabtree Automotive to TriStar for an amount equal to the net worth of Crabtree Automotive as of May 31, 1989 plus $1,000,000. This agreement provided that the initial purchase price would be adjusted up or down to reflect the net worth of Crabtree Automotive as determined by a certified "Closing Date Balance Sheet" to be prepared as of August 31, 1989 in accordance with the instructions set forth in the Stock Purchase Agreement.*fn3

Although the closing had not yet taken place, TriStar took over the management of the Crabtree Automotive assets on August 15, 1989 pursuant to the Management Agreement. According to plaintiffs, TriStar immediately embarked upon a course of conduct intended to prevent the preparation of an accurate Closing Date Balance Sheet so that the defendants could justify their refusal to pay the plaintiffs the sums of money to which they were entitled. Plaintiffs allege that as part of this scheme TriStar fired all of the personnel familiar with the bookkeeping and financial practices, installed a new computer system which destroyed the bookkeeping systems and records for the business, and systematically removed all of the business records to a new location, confusing them to such an extent that the financial status of the purchased entities could not be determined.

The transaction closed on September 8, 1989. At that time, TriStar paid the plaintiffs roughly $4.5 million;*fn4 approximately $1.5 million was placed in escrow on the contingency that offsets, as provided for in the Related Agreements, would be necessary. The Stock Purchase Agreement required TriStar to hire Kera, Weiner & Co. ["Kera Weiner"], a certified public accounting firm, to prepare a combined and consolidated balance sheet which reflected the value of Crabtree Automotive as of the closing date so that any necessary adjustments to the original purchase price could be calculated. Roughly eight months after the closing, Kera Weiner wrote to TriStar and Robert Crabtree, informing them that because of difficulties encountered in locating records and supporting documentation and concerns about the completeness of available records, the accounting firm believed that it could not express an opinion on the Closing Date Balance Sheet based on acceptable accounting procedures. TriStar then arranged for another accounting firm, O'Connor & Drew, P.C. ["O'Connor & Drew"] to prepare the balance sheet. Based on both adjustments resulting from the balance sheet prepared by O'Connor & Drew and offsets to which TriStar asserted it was entitled under the terms of the Related Agreements, TriStar claimed that the sellers of Crabtree Automotive owed to it over $9 million, exclusive of interest.

In December 1989, plaintiffs filed this action in state court which was removed to this court immediately thereafter. In their answer, certain defendants asserted counterclaims against Crabtree and others. The complaint alleges that defendants violated the Racketeer Influenced and Corruption Organizations Act, 18 U.S.C. § 1961 et seq. Pendent state claims of fraudulent inducement, negligent inducement, breach of contract, breach of fiduciary duty, and conversion are appended. Plaintiffs also seek to foreclose on a note and second mortgage executed in favor of the plaintiffs by TriStar.

Presented now for the court's consideration are the defendant's motion to compel arbitration and stay the proceedings and a motion to dismiss.

MOTION TO COMPEL ARBITRATION

The Stock Purchase Agreement required TriStar to "cause" Kera Weiner to prepare the Closing Date Balance Sheet within 90 days after the closing date. After delivery of this document to the parties, the agreement gave the plaintiffs or TriStar the right within 30 days to dispute any item contained therein. The Agreement further provides that if the parties could not resolve the dispute within 15 days,

  such dispute shall be resolved by a `Big Eight'
  accounting firm selected by Kera Weiner (the
  accounting firm so selected shall hereinafter be
  referred to as the `Independent Accounting Firm');
  the determination of the Independent Accounting
  Firm shall be made as promptly as practical and
  shall be final and binding on the Purchaser and
  the Sellers.

Stock Purchase Agreement, Section 2.4(a).*fn5 This arbitration clause states that failure to dispute any item contained on the balance sheet renders the sheet final.

It is undisputed that Kera Weiner never delivered a Closing Date Balance Sheet to the parties. As a result, TriStar retained the services of another accounting firm, O'Connor & Drew. In November 1990, this firm made available to both parties a preliminary worksheet in which the stockholders' equity in Crabtree Automotive was determined to be in excess of negative $4 million as of the closing date. On February 14, 1991, a revised schedule containing the final Closing Date Balance Sheet was sent to the plaintiffs' attorney. This balance sheet reflected a negative stockholders' equity approaching $5 million. According to defendants, the result, after incorporating offsets due to them as provided for in the Related Agreements, was a closing date balance sheet adjustment in favor of TriStar in the amount of $9.2 million.

TriStar made several demands of Crabtree that the matter of the Closing Date Balance Sheet be submitted to arbitration and now moves to compel arbitration. TriStar contends that Crabtree is either bound by the Closing Date Balance Sheet adjustment by his failure to object or is compelled by the terms of the Stock Purchase Agreement to submit to arbitration.*fn6

The federal courts have a broad mandate to enforce arbitration agreements. See, e.g., Moses H. Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983); Rush v. Oppenheimer & Co., Inc., 779 F.2d 885, 887 (2d Cir. 1985). Indeed, if the court is satisfied that there is no dispute concerning the making of the agreement or the failure to comply with it, it should direct the parties to proceed to arbitration in accordance with the terms of the agreement. 9 U.S.C. § 4 (1988). In light of the federal policy favoring arbitration as an alternative dispute resolution process, see Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 480-81, 109 S.Ct. 1917, 1919-20, 104 L.Ed.2d 526 (1989), any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. Moses H. Cone, 460 U.S. at 24-25, 103 S.Ct. at 94142; David L. Threlkeld & Co., Inc. v. Metallgesellschaft Ltd. (London), 923 F.2d 245, 248 (2d Cir.), cert. dismissed, ___ U.S. ___, 112 S.Ct. 17, 115 L.Ed.2d 1094 (1991). Arbitration clauses are therefore construed as broadly as possible. S.A. Mineracao Da Trinidade-Samitri v. Utah Int'l, Inc., 745 F.2d 190, 194 (2d Cir. 1984).

To give fruition to these policies and statutory mandates, a court asked to stay proceedings pending compulsory arbitration under the Federal Arbitration Act must undertake a four-step analysis:

  [F]irst, it must determine whether the parties
  agreed to arbitrate; second, it must determine the
  scope of that agreement; third, if federal
  statutory claims are asserted, it must consider
  whether Congress intended those claims to be
  nonarbitrable; and fourth, if the court concludes
  that some, but not all, of the claims in the case
  are arbitrable, it must then determine whether to
  stay the balance of the proceedings pending
  arbitration.

Genesco, Inc. v. T. Kakiuchi & Co. Ltd., 815 F.2d 840, 844 (2d Cir. 1987); see McDonnell Douglas Finance v. Pennsylvania Power & Light Co., 858 F.2d 825, 830 (2d Cir. 1988).

Crabtree does not deny the existence of the arbitration provision in the Stock Purchase Agreement but does deny its applicability to the dispute at hand. Specifically, Crabtree suggests that this arbitration provision is a "narrow" clause and, as such, the scope of the arbitration is limited to the subject of the Closing Date Balance Sheet. Crabtree points out that the subject matter contemplated by the arbitration provision, i.e., a Closing Date Balance Sheet created by Kera Weiner, never came into existence and argues, therefore, that any dispute concerning the adjustments as determined by O'Connor & Drew need not be arbitrated.

We agree with Crabtree that the arbitration provision contains sufficient limiting language to warrant characterization as "narrow". See id., 858 F.2d at 832 (arbitration clause deemed narrow because its effect was limited to specific circumstances); Prudential Lines, Inc. v. Exxon Corp., 704 F.2d 59, 64 (2d Cir. 1983) (arbitration provision specifically limited to disputes regarding responsibility for repairs, renewals or replacement construed as "narrow"). Because the rules governing the application of broad arbitration clauses "that purport to refer all disputes arising out a contract to arbitration" and narrow clauses "that limit arbitration to specific types of disputes" are different, McDonnell Douglas, 858 F.2d at 832, when a narrow clause is in issue, the court is limited to carrying out the specific and limited intent of the parties, S.A. Mineracao, 745 F.2d at 193; see ...


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