United States District Court, S.D. New York
OPINION AND ORDER
JESSE M. FURMAN, District Judge.
Petitioner HBC Solutions, Inc. ("HBC") moves, pursuant to Sections 4 and 206 of the Federal Arbitration Act (the "FAA"), 9 U.S.C. §§ 4 and 206, to compel Respondent Harris Corporation ("Harris") to arbitrate a dispute regarding the price HBC paid for part of Harris's business (the "Business"). (Am. Pet. To Compel Arbitration (Docket No. 23) ¶¶ 1-2, 16). HBC maintains that the disputes are subject to a purchase price dispute resolution process set forth in the parties' agreement, which requires arbitration before an accountant. By contrast, Harris contends that the disputes concern representations and warranties made in the parties' agreement and are subject to indemnification provisions in the parties' agreement rather than the purchase price dispute resolution process. Although the principal disagreement is over who should resolve the parties' purchase price disputes, more is at stake as Harris's liability under the indemnification provisions is capped at $17.5 million, whereas there is no limitation on the adjustments that can be made pursuant to the purchase price dispute resolution process and HBC is seeking adjustments totaling approximately $100 million.
For the reasons stated below, the Court agrees that the parties' disputes fall within the scope of the purchase price dispute resolution process and are therefore subject to arbitration before an accountant. Accordingly, HBC's motion to compel arbitration is granted.
The following facts are taken from the pleadings, as well as the declarations submitted in support of, and opposition to, the instant motions. See, e.g., Bensadoun v. Jobe-Riat, 316 F.3d 171, 175 (2d Cir. 2003) ("In the context of motions to compel arbitration..., the court applies a standard similar to that applicable for a motion for summary judgment."). The facts are undisputed except where noted, and all inferences are drawn in Defendant's favor. See, e.g., Russell v. Mimeo, Inc., No. 08-CV-5354 (RJS), 2008 WL 6559743, at *1 (S.D.N.Y. Oct. 29, 2008) (noting that, where a motion to compel arbitration is opposed on the ground that the parties did not agree to arbitrate, the court "should give the opposing party the benefit of all reasonable doubts and inferences that may arise." (internal quotation marks omitted)).
A. The Agreement
In 2012, Harris's owners decided to sell the Business - comprised of assets in the United States and twenty-three foreign jurisdictions - and commenced an auction to do so. (Decl. Lewis A. Schwartz (Docket No. 41) ("Schwartz Decl.") ¶ 2). Ten parties bid on the Business and, after multiple rounds of bidding, Harris selected HBC over one other finalist based on HBC's offer, which included $160 million in cash, a $15 million subordinated promissory note, and up to $50 in an earn out - approximately $10 million more than the other finalist had offered. ( Id. ¶¶ 2-3). On December 5, 2012, the parties entered into an asset sale agreement, formalizing the outcome of the auction (the "Agreement" or "ASA"). ( Id. ¶ 4; Decl. Shahriyar Rahmati Supp. Pet. To Compel Arbitration (Docket No. 4) ("Rahmati Decl."), Ex. A ("ASA")). The parties largely consummated the transaction on February 4, 2013, referred to in the Agreement as the "Initial Closing Date." (Schwartz Decl. ¶ 4; ASA § 3.2(a)).
Prior to entering the Agreement, HBC conducted due diligence, based in part on a set of Harris's financial statements, including its 2012 balance sheet, audited annual statements, and unaudited statements for the three months prior to September 28, 2012. ( See ASA §§ 4.9, 5.7; Mem. Resp. Opp'n Petitioner's Am. Pet. To Compel Arbitration (Docket No. 40) ("Harris Mem.") 4-5). In Section 4.9 of the Agreement, Harris represented and warranted that, with limited exceptions not relevant here, its financial statements were "prepared in accordance with the accounting records and policies of [Harris]" and with United States Generally Accepted Accounting Principles ("U.S. GAAP") and "present[ed] fairly in all material respects the assets and liabilities of the Business as of the dates thereof and the results of its operations for the periods then ended." (ASA § 4.9).
The Agreement fixed the Business's "Target Working Capital" at $123.1 million, and set a gross purchase price of $175 million. ( Id. §§ 1.1, 3.1(a)). As is common in this complex type of transaction, however, the Agreement also included a multi-step process to adjust the purchase price based on the value of the Business's cash, indebtedness, and working capital as of the closing date. (ASA §§ 3.1, 3.3). First, under Section 3.1(b) of the Agreement, Harris was required, no later than five business days before the Initial Closing Date, to provide a pre-closing certificate setting forth its good-faith estimates of "Closing Working Capital, " "Cash, " and "Closing Indebtedness" as of the Initial Closing Date. ( Id. § 3.1(b)). Section 3.1(b) further provided that Harris was to prepare those amounts "in accordance with U.S. GAAP and, to the extent consistent with U.S. GAAP, the accounting principles and methodologies followed by [Harris] in its preparation of" its financial statements - defined in the Agreement as "the Accounting Principles." ( Id. ; see also Harris Mem. 6).
Next, the Agreement provided for a "Purchase Price Adjustment" based upon a postclosing calculation of Closing Working Capital, Cash, and Closing Indebtedness as of the Initial Closing Date. Specifically, pursuant to Section 3.3(a), Harris was required, within ninety days of the Initial Closing Date, to provide HBC with a "Closing Certificate" setting forth its good-faith calculation of those amounts, "prepared in accordance with the Accounting Principles, " and - on the basis of those amounts - a proposed "Adjustment Amount." ( See also id. § 3.3(e)). Under Section 3.3(b), HBC then had ninety days to deliver to Harris a "Dispute Notice, " setting forth, "in reasonable detail, each disputed item or amount and the basis for [HBC's] disagreement therewith." The Agreement provides in relevant part that, if any such disagreements are not resolved within thirty days, the parties "shall jointly retain Grant Thornton" - defined as the "Accountant" - "to resolve the issues set forth in the Dispute Notice." ( Id. § 3.3(c)).
Significantly, Article XI of the Agreement contains a separate set of provisions requiring Harris to indemnify and hold HBC harmless "from and against... any misrepresentation, breach, or inaccuracy of any representation or warranty... contained in or made pursuant to" the Agreement "or any certificate delivered to" HBC pursuant to the Agreement. ( Id. § 11.1). Whereas there is no limitation on the size of the adjustments that can be made pursuant to the Purchase Price Adjustment process, Harris's liability under the indemnification provisions is strictly limited. Specifically, to the extent relevant here, Section 11.5(b) of the Agreement provides that Harris is not liable unless actual damages from a breach exceed $1.8 million (and then only for the amount in excess of $1.8 million), and caps Harris's liability at $17.5 million (or 10% of the gross purchase price). ( Id. § 11.5(b)(i)-(ii)). Additionally, any action under the indemnification provisions must be submitted to the exclusive jurisdiction of this Court or a New York State Court in Manhattan and any such action "shall be governed by, and construed and enforced in accordance with, the Laws of the State of New York." ( Id. § 13.2).
Section 11.9 of the Agreement explicitly provides that the indemnification remedies set forth in Article XI are the "sole and exclusive remedy for any claims (other than for fraud) made in connection with" the Agreement. In addition, however, it prominently states that "NOTWITHSTANDING THE FOREGOING, THIS SECTION 11.9 SHALL NOT OPERATE TO INTERFERE WITH OR IMPEDE THE OPERATION OF THE PROVISIONS HEREOF PROVIDING FOR THE RESOLUTIONS OF CERTAIN DISPUTES BY THE ACCOUNTANT" - that is, pursuant to the Purchase Price Adjustment process set forth in Section 3.3 of the Agreement and described above. ( Id. § 11.9; see also Resp't's Sur-Reply Opp'n Pet'r's Am. Pet. To Compel Arbitration (Docket No. 50) ("Harris Sur-Reply") 2-3; HBC Solutions, Inc.'s Reply Mem. Further Supp. Am. Pet. To Compel Arbitration (Docket No. 45) ("HBC's Reply Mem.") 11). Reinforcing this carve out from the indemnification provisions, Section 3.3(g) of the Agreement provides that "[a]ll matters that are the subject of a Dispute Notice shall be conclusively settled between the parties for all purposes of this Agreement (including Section 11.1 ) pursuant to" the Purchase Price Adjustment process (including, if necessary, arbitration before the Accountant), and that "no claim may thereafter be brought under any other provision of this Agreement (including Section 11.1 ) with respect to such matters."
B. The Dispute
In accordance with the process set forth in the Agreement, Harris delivered a pre-closing certificate to HBC on January 28, 2013, and an amended certificate (by agreement) four days later. (Schwartz Decl., Ex. 1). The certificate calculated the Unadjusted Purchase Price to be approximately $164 million, based in part on Harris's estimate that the Business's Closing Working Capital was roughly $110 million. ( Id. ). On May 3, 2013, Harris delivered the Closing Certificate to HBC, calculating Closing Working Capital as only $92 million and proposing a corresponding downward adjustment to the purchase price of approximately $18.7 million. (Rahmati Decl., Ex. B). On August 1, 2013, however, HBC provided Harris with a Dispute Notice contending that Harris's calculations in the Closing Certificate were "based on a misapplication of U.S. GAAP and/or Harris accounting policies in conflict with the requirements of the [Agreement] and the Accounting Principles." ( Id., Ex C, at 1-2). Whereas Harris calculated Closing ...