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Mooney v. Diversified Business Communications

Superior Court of Massachusetts, Suffolk, Business Litigation Session

February 2, 2018

John J. MOONEY, et al.

          File Date: February 5, 2018


          Kenneth W. Salinger, Justice of the Superior Court

         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.

         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, 549-50 (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 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 to 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 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 ...

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