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Duafala v. Globecomm Systems Inc.

United States District Court, E.D. New York

February 5, 2015

RICHARD DUAFALA, Representative of ComSource, Inc. Stockholders, Plaintiff,
v.
GLOBECOMM SYSTEMS INC., Defendant

For Plaintiff: Brian K. Gallagher, Esq., Gallagher, Harnett & Lagalante LLP, New York, NY.

For Plaintiffs: Jeffrey M. Schwaber, Esq., Deanna L. Peters, Esq., Stein Sperling Bennnett DeJong Driscoll PC, Rockville, MD.

For Defendant: Jonathan Mark Wagner, Esq., Tobias B. Jacoby, Esq., Kramer Levin Naftalis & Frankel LLP, New York, NY.

Page 331

MEMORANDUM AND ORDER

LEONARD D. WEXLER, UNITED STATES DISTRICT JUDGE.

Before the Court is the motion of Globecomm Systems Inc. (" Globecomm" or " Defendant" ) to compel arbitration pursuant to the Federal Arbitration Act (" FAA" ), 9 U.S.C. § 1, et seq., or to dismiss Plaintiffs breach of contract claims and request for accounting pursuant to Federal Rules of Civil Procedure (" Fed.R.Civ.P," ), Rule 12(b)(6). Defendant also seeks to dismiss, or alternatively stay, Plaintiff's fraud claim pursuant to Fed.R.Civ.P., Rules 8(a), 9(b) and 12(b)(6). For the reasons that follow, Defendant's motion to compel arbitration is granted, and accordingly, Defendant's motions to dismiss the breach of contract and accounting claims are denied. Defendants' motion to dismiss the fraud claim is denied, and the motion to stay that claim pending arbitration is granted.

BACKGROUND

I. Factual Background

A. The Agreement

The facts that follow are taken from Plaintiff's Amended Complaint (" AC" or

Page 332

" Complaint" ) or the parties' Agreement and Plan of Merger (the " Agreement" ). This action stems from the purchase of ComSource, Inc. (" ComSource" ) by Globecomm through the Agreement entered into on April 8, 2011. AC, ¶ 1. ComSource, founded in 2004, provides engineering services, software development and testing for telecommunications equipment. By the end of 2010, it achieved unaudited revenues of $22.7 million. AC, ¶ 6. Because of his health issues, ComSources' majority stockholder, Jerald C. Cruce (" Cruce" ) sought to sell the company and used an investment banking firm to market the company to potential purchasers. AC, ¶ 7.

The goal of the ComSource's stockholders was to obtain the highest value for their shares and ensure that ComSource's business would continue to grow. AC, ¶ 10. Globecomm made an offer which included an initial cash payment, as well as additional cash and stock earn out payments (" Earn Out Payments" ) in each of the two years following the merger, based on the amount of business conducted in each of those two years. AC, ¶ ¶ 11-14. Based on Globecomm's representations that it had the resources and desire to continue to grow ComSource's business, ComSource's stockholders rejected other offers with a higher initial cash payment in favor of Globecomm's offer. AC, ¶ ¶ 11-12.

The Agreement was executed and effective as of April 8, 2011. Section 2.05 of the Agreement and its Exhibit G detail how the Earn Out Payments would be calculated for Year 1 and Year 2. Such payments would be made after Globecomm met certain earnings targets, or Earnings Before Interest, Taxes, Depreciation, and Amortization (" EBITDA" ). AC, ¶ 15. Thus, calculation of the EBITDA was the first step in determining the value of the Earn Out Payments.

An Earn Out Payment was made in Year 1 in the amount of $4,700,000. AC, ¶ ¶ 18-19. Therefafter, starting in June 2012, Globecomm estimated that it did not expect to make an Earn Out Payment in Year 2. AC, ¶ ¶ 20-21. On April 22, 2013, Globecomm sent a notice to Richard Duafala as the Stockholders' Representative,[1] that based on the EBITDA for Year 2, no Earn Out Payments were due. AC, ¶ 22. According to the Complaint, Globecomm's EBITDA figure for Year 2 was an 82% drop from Year 1 and a " vast departure" from the level of business conducted by ComSource at the time of the Agreement. AC, ¶ 23.

After receiving that notice, Duafala and an accountant traveled to see certain books and records as permitted by the Agreement, and soon thereafter, Duafala sent Globecomm an Earn Out Dispute Notice, requesting to see certain documents, pursuant to Section 2.05(b). AC ¶ ¶ 25-26. Duafala alleges the information requested was not produced, and that the EBITDA figures were " incorrect" and " undervalued." AC, ¶ ¶ 28-31.

Section 2.05 of the Agreement, titled " Earn Out," describes how the EBITDA is calculated and the Earn Out Amounts determined. In the event of a dispute over the calculation of the EBITDA, Section 2.05(b) provides that such dispute shall be settled " in accordance with the procedures set forth in Section 2.03(c)," which states:

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all amounts remaining in dispute shall be submitted for resolution to a recognizable, reputable and impartial certified public accounting firm that is mutually acceptable to Parent and Stockholders' Representative (the " Neutral Firm" ).... Within thirty (30) days, ... the Neutral Firm shall deliver ...

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