Schafer v. Multiband Corp.

57 F.Supp.3d 792

Bernard SCHAFER and Henry Block, Plaintiffs

v.MULTIBAND CORPORATION, Defendant.

Case No. 12–cv–13152.

United States District Court, E.D. Michigan, Northern Division.

Signed Oct. 31, 2014.

Dana Howard, Phillip Douglas Barr, Stoll, Keenon, Ogden PLLC, Lexington, KY, Patrick E. Heintz, Bishop and Heintz, Traverse City, MI, for Plaintiffs.

Andrew D. Concannon, Smith, Bovill, Saginaw, MI, for Defendant.

ORDER DENYING PLAINTIFFS' MOTION TO VACATE, GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT, AND AFFIRMING ARBITRATOR'S AWARD

THOMAS L. LUDINGTON, District Judge.

In 2008 Defendant Multiband sought to purchase Plaintiffs' stock in DirecTECH Holding Company. Multiband was informed that the Department of Labor had been investigating certain transactions in 2003 to 2006 regarding the Holding Company's employee stock ownership plan; indeed, Multiband received detailed reports concerning the investigation. At some point the parties reached an agreement for Multiband's purchase of Plaintiffs' stock that included Multiband's agreement to assume prior indemnity obligations that had been executed in favor of Plaintiffs.

The Department of Labor did file suit against Plaintiffs, seeking about $42 million; however, the Department of Labor and Plaintiffs reached a settlement for $2.9 million. There was no admission of liability, and Multiband was kept informed throughout the course of the proceedings.

Plaintiffs then sought indemnity from Multiband pursuant to the agreements for the settlement amount and legal expenses. Inexplicably, Multiband then refused to honor the indemnity agreements that had been inked less than three years earlier. Plaintiffs began the arbitration proceeding and sought either indemnity pursuant to the agreements or, alternatively, damages for inducing their reliance on Multiband's indemnification agreements.

The parties agreed to submit a series of issues related to the enforceability of the indemnity agreements to the arbitrator as a preliminary matter. Multiband argued that the indemnity agreements were unenforceable. The arbitrator not only found the indemnity agreements unenforceable, he also concluded the arbitration without attention to Plaintiffs' alternative argument—that they relied on Multiband's agreements to indemnify them in entering into the agreement to sell their stock to Multiband.

This litigation ensued. This Court agreed with Plaintiffs that the arbitrator manifestly disregarded the law in finding the indemnification agreements “void as against public policy.” Because this Court vacated the arbitration award on this ground, it did not take up Plaintiffs' alternative request for relief—that the Court should vacate the award or reopen the arbitration because the arbitrator exceeded his powers by sua sponte concluding the arbitration without giving attention to Plaintiffs' alternate claim for fraudulently inducing them to enter into the indemnity agreements.

The Sixth Circuit reversed due primarily to its determination that the arbitrator's decision was not in manifest disregard of the law. The parties presently dispute, however, whether the Sixth Circuit, in reversing the vacatur, also addressed and decided Plaintiffs' alternative argument that the arbitrator exceeded his powers by sua sponte concluding the arbitration without attention to Plaintiffs' alternative argument. Because it appears that Plaintiffs presented their alternative argument to the Sixth Circuit, and because it appears the Sixth Circuit rejected the argument, this Court is reluctantly bound to grant Multiband's motion to affirm the arbitration award.

I

Plaintiffs Bernard Schafer and Henry Block founded and owned Michigan Microtech, Inc., a company that sells and installs satellite television equipment. After the initial success of Michigan Microtech, they expanded their business and acquired partial ownership and management interests in DirecTECH, DirecTECH Southwest, Inc., and JBM, Inc.

Plaintiffs created a holding company, DirecTECH Holding Company, Inc., (“Holding Company”), which became the parent company of all four entities (Michigan Microtech, DirecTECH, DirecTECH Southwest, Inc., and JBM, Inc.).

As directors of the Holding Company, Plaintiffs executed an indemnification agreement that provided that Plaintiffs would be indemnified for all losses incurred in connection with their roles as directors of the Holding Company, with exceptions for deliberate wrongful acts and gross negligence:

The Company hereby agrees to indemnify and hold the Board Member harmless from and against any and all past, present or future losses, claims, damages, expenses, or liabilities (including, but not limited to, reasonable attorney's fees, court costs, judgments, fines, excise taxes related to litigation or aggregate amount pain [sic] in reasonable settlement of any actions, suites [sic], proceedings, or claims) (hereinafter collectively referred to as “Loss”), incurred in connection with any and all actions, proceedings, or suits of any kind or nature whatsoever, which arises as a result of acts or omissions of the Board Member within the scope of his activities for and on behalf of the Company and which do not involve wrongful acts or gross negligence by the Board Member.

The indemnification agreement also contained a mandatory arbitration clause.

In addition, the Holding Company also formed its own employee stock ownership plan (“ESOP”) and an employee stock ownership trust (“ESOT”). Plaintiffs became trustees of the Holding Company ESOP and ESOT, and executed an almost-identical indemnification agreement regarding their roles as trustees.

A

In 2005, the United States Department of Labor (“DOL”) began investigating the Holding Company and its four subsidiaries regarding stock transactions involving the ESOP and ESOT. The DOL suspected that directors and trustees of the Holding Company had breached their fiduciary duties by purchasing company stock for the ESOP at inflated prices.

i

Despite the DOL investigation, Defendant Multiband began negotiating the purchase of the Holding Company. In 2007, Multiband and the Holding Company agreed on a plan of acquisition and began transitioning operations to Multiband. During this transition, the Holding Company provided a detailed report of the DOL's investigation.

As an attempt to induce Plaintiffs to sell its corporate stock in the Holding Company, Multiband executed indemnification agreements for losses Plaintiffs might incur in connection with their past service as trustees to the ESOP and ESOT. Specifically, Multiband agreed to indemnify each Plaintiff for any losses “which arise as a result of acts or omissions of the Board Member within the scope of his activities for and on behalf of [the Holding Company] ... which do not involve deliberate wrongful acts or gross negligence by the board member.”

Based on these indemnification promises, Plaintiffs agreed to enter into a stock purchase agreement with Multiband. Plaintiffs assert (and Multiband does not dispute) that these agreements were material to Plaintiffs' decision to sell their stock: “Had Multiband not agreed to undertake such indemnity obligations, it is undisputed that the stock purchase price of $43.9 Million would have been substantially higher and/or the transaction would not have occurred.” Mot. to Vacate 2, ECF No. 27. On January 1, 2009, Multiband completed the purchase of the Holding Company. Multiband paid $43.9 million for Plaintiffs' shares in the Holding Company.

ii

In December 2009, the DOL filed a civil suit against Plaintiffs, alleging that they breached their fiduciary duties by allowing the ESOP to purchase company stock at inflated prices. In 2011, Plaintiffs reached a settlement agreement with the DOL. Plaintiffs agreed to each pay $1,450,000.00 to the DOL while admitting no liability for the allegations in the complaint.

Following the entry of the settlement agreement, Plaintiffs sought indemnification from Multiband pursuant to the terms of the indemnification agreements, but Multiband refused to honor the indemnification agreements.

B

On October 18, 2011, Plaintiffs filed an arbitration complaint against Multiband. Plaintiffs' primary claim involved Multiband's alleged breach of contract based on the various indemnification agreements.¹ The threshold issue, Multiband contended, was whether the indemnification agreements were void as against public policy under 29 U.S.C. § 1110(a)² : Plaintiffs argued that the indemnification agreements were permissible and enforceable; Multiband argued that they were void.³

Because Multiband argued that the indemnification agreements were void, Plaintiffs brought an alternative claim grounded on two legal theories. First, Plaintiffs alleged that Multiband fraudulently induced Plaintiffs to enter into an indemnification agreement that Multiband knew was void. They alleged that Multiband made false representations that it would assume the indemnification obligations when “Multiband never intended to honor its indemnification obligations.” Mot. Vacate Ex. 3 ¶¶ 154, 160, ECF No. 9.

Second, Plaintiffs alleged that Multiband was estopped to challenge the indemnity agreements as unenforceable. Plaintiffs alleged that they had in fact relied to their detriment on Multiband's indemnification promises in selling their stock in the Holding Company. Plaintiffs reiterated that had Multiband not agreed to undertake the indemnification obligations, Multiband's purchase price for the stock would have been substantially higher.

Plaintiffs did not seek rescission of the indemnification provisions under either of these alternative claims (fraudulent inducement or estoppel); instead, they sought consequential, incidental, and punitive damages.

i

To streamline the arbitration, Plaintiffs and Multiband agreed to submit the threshold issues Multiband raised regarding Plaintiffs' breach of contract claim only to the arbitrator for summary disposition. The submitted issues addressed only the legal principle...