SGS N. Am., Inc. v. Mullholand

135 N.E.3d 646

SGS NORTH AMERICA, INC., Appellant-Defendant,

v.Christine MULLHOLAND, as Stockholder Representative of Cybermetrix, Inc., Appellee-Plaintiff

Court of Appeals Case No. 19A-PL-1283

Court of Appeals of Indiana.

FILED November 14, 2019

Attorneys for Appellant: Siobhán M. Murphy, Benjamin C. Hoffman, Lewis Brisbois Bisgaard & Smith LLP, Indianapolis, Indiana, Brian P. Graffeo, Joel Plainfield, Kaplan, Williams, Graffeo & Stern LLC, Morristown, New Jersey

Attorneys for Appellee: George A. Gasper, Derek R. Molter, Audrey K. Howard, Ice Miller LLP, Indianapolis, Indiana

Crone, Judge.

Case Summary

[1] This case arises from a dispute concerning whether purchasers owe sellers what is commonly referred to as an "earnout" under a stock purchase agreement. SGS North America, Inc. ("SGS"), appeals the trial court's order granting an application to confirm arbitration award filed by Christine Mullholand, as stockholder representative for the stockholders of Cybermetrix, Inc. (respectively "Mullholand" and "CMX"). In brief, Mullholand sold her company, CMX, to SGS and, in addition to the base purchase price, SGS agreed to pay CMX stockholders certain amounts (earnouts) contingent upon CMX's 2015 earnings before interest, taxes, depreciation, and amortization ("EBITDA") and CMX's 2015 and 2016 combined EBITDA. SGS paid the first contingent payment but not the second, claiming that CMX's 2015 and 2016 combined EBITDA did not meet the applicable threshold for the second contingent payment. Pursuant to the relevant provision of the parties' purchase agreement, the parties hired an auditor to perform an independent audit of CMX's 2015 and 2016 combined EBITDA and to resolve the earnout dispute. The auditor determined that CMX's 2015 and 2016 combined EBITDA met the threshold and entered a "final, conclusive, and binding" determination awarding the stockholders the second contingent payment of $3,000,000 plus a portion of the auditor's fees. SGS disagreed with the determination and refused to pay, so Mullholand filed the current claim to enforce the auditor's determination, characterizing such as a binding arbitration award. The Marion County Commercial Court agreed with Mullholand and entered an order confirming the award and entering judgment in Mullholand's favor. We affirm.

Facts and Procedural History

[2] CMX is an engineering and consulting business that provides management, test system design services, and engineering services. Mullholand founded and then operated CMX in Columbus for approximately twenty-five years until, on February 1, 2016, Mullholand and SGS entered into a stock purchase agreement ("the Purchase Agreement") for the sale and purchase of all the issued and outstanding shares of CMX's capital stock. SGS is a New Jersey corporation that is a subsidiary of an international corporation, SGS SA, that provides services similar to CMX. The Purchase Agreement provided a $21,000,000 base purchase price plus an additional contingent purchase price mechanism whereby stockholders would potentially receive additional payments from SGS ("First Contingent Payment" and "Second Contingent Payment") based on whether CMX's 2015 and 2016 EBITDA exceeded certain threshold amounts. Specifically, as the First Contingent Payment, the stockholders would receive an earnout of $4,000,000 if CMX's 2015 EBITDA was between $4,146,048 and $4,606,720, or an earnout of $5,000,000 if CMX's 2015 EBITDA was equal to or greater than $4,606,720. Appellant's App. Vol. 3 at 25. As the Second Contingent Payment, the stockholders would receive an earnout of $8,000,000 (minus the First Contingent Payment) if CMX's 2015 and 2016 combined EBITDA was between $8,915,067 and $9,905,630, or an earnout of $10,000,000 (again minus the First Contingent Payment) if CMX's 2015 and 2016 combined EBITDA was equal to or greater than $9,905,630. Id.

[3] CMX's EBITDA for 2015 exceeded the applicable threshold of $4,606,720, and SGS paid the stockholders the First Contingent Payment of $5,000,000. However, according to SGS's calculations, CMX's 2015 and 2016 combined EBITDA did not meet the applicable threshold for the Second Contingent Payment. On February 28, 2017, SGS submitted a price report to Mullholand with SGS's calculations showing that CMX's 2015 and 2016 combined EBITDA fell just below the threshold amount set forth in the Purchase Agreement and stating that SGS believed that a Second Contingent Payment was not owed to the stockholders. Mullholand provided written notice to SGS of the stockholders' objection to SGS's submission.

[4] The parties were ultimately unsuccessful in resolving their disagreement as to SGS's calculations of CMX's 2015 and 2016 combined EBITDA and whether the Second Contingent Payment was owed. Section 2.7(b) of the Purchase Agreement provided a binding dispute resolution procedure for such disputes which stated in relevant part:

In the event that the Stockholder Representative [i.e., Mulholland] objects to the [Contingent Purchase Price Report] submissions made by the Purchaser, the Purchaser and the Stockholder Representative shall use reasonable efforts to resolve any such objections. If no resolution is reached..., the Purchaser and the Stockholder Representative shall submit the issue to the Designated Auditor to review the submission. The Designated Auditor, shall, after reviewing all relevant matters as it deems appropriate, deliver to the Stockholder Representative and the Purchaser a Designated Auditor Statement setting forth its calculations of EBITDA and the Contingent Purchase price (if any) payable, which shall be final and binding upon all of the parties to this Agreement.

Id. at 29.

[5] Accordingly, in July 2018, SGS and Mullholand retained Ernst and Young, LLP ("EY"),¹ to serve as the Designated Auditor and to calculate CMX's applicable EBITDA and to render a determination, delivered in the form of the "Designated Auditor Statement," that would be final and binding upon the parties, as contemplated by the Purchase Agreement. The agreement between the parties and EY was memorialized in an engagement agreement ("EY Engagement Agreement"). The EY Engagement Agreement provided that each party "shall cooperate fully with the Designated Auditor during the arbitration " and provided a schedule of deadlines for "the arbitration ," and the parties agreed that "the Designated Auditor Statement will be conclusive and binding upon them with respect to the disputed items it addresses." Id. at 107-111 (emphases added).

[6] The parties submitted voluminous materials to EY over the next several months. EY spent 415 hours evaluating the parties' submissions and issued an extensive and detailed Designated Auditor Statement on November 1, 2018. In short, EY determined that CMX's 2015 and 2016 combined EBITDA met the threshold requirement for a Second Contingent Payment and that the stockholders were entitled to $3,000,000 plus half the fees and expenses advanced to EY as the Designated Auditor ($107,000). The Designated Auditor Statement provided that, per the Purchase Agreement and the EY Engagement Agreement, this decision was "final, conclusive, and binding." Id. at 134.

[7] On November 28, 2018, SGS requested that EY review the findings contained in the Designated Auditor Statement or, in the alternative, provide SGS with certain clarifications. EY declined SGS's request, reiterating to SGS that pursuant to the terms of the Purchase Agreement, the Designated Auditor Statement was "final, conclusive, and binding" on the parties. Appellant's App. Vol. 2 at 20. Section 2.3(c)(ii) of the Purchase Agreement provided that SGS was to pay the stockholders the amount awarded within twenty days of the release of the Designated Auditor Statement. SGS did not make payment to the stockholders.

[8] On January 11, 2019, Mullholand filed an amended complaint for confirmation of arbitration award or, in the alternative, complaint for breach of contract in the Marion County Commercial Court.² Specifically, Mullholand requested that the trial court confirm EY's $3,107,000 award in the stockholders' favor and enter judgment pursuant to Indiana's Uniform Arbitration Act, Indiana Code Chapter 34-57-2. In the alternative, Mullholand asserted that even if EY's decision did not constitute a binding arbitration decision, SGS's refusal to honor EY's decision was a breach of the Purchase Agreement. On February 7, 2019, Mullholand filed an application for confirmation of arbitration award, or in the alternative, a motion for summary judgment on the breach of contract claim. In response, SGS filed a motion to dismiss Mullholand's amended complaint pursuant to Indiana Trial Rule 12(B)(6) or, in the alternative, a motion to compel arbitration and stay the action. SGS argued that EY's determination did not constitute an arbitration award and thus Mullholand failed to state a claim upon which relief could be granted. In the alternative, SGS argued that the EY Engagement Agreement provided that any disputes regarding EY's calculations were themselves subject to arbitration and thus the court should stay the action and compel arbitration.

[9] The trial court held a hearing on all pending motions on April 10, 2019. Thereafter, the trial court entered its order granting Mullholand's application to confirm the arbitration award and denying SGS's motion to dismiss. The court concluded pursuant to Delaware law, which governs the interpretation of the Purchase Agreement, that the parties unambiguously agreed to arbitrate earnout disputes, that EY's determination constituted an arbitration award, and that SGS is bound by that determination. The trial court did not address Mullholand's alternative request for summary judgment on the breach of contract claim. The trial court entered judgment in favor of Mullholand for $3,107,200, plus interest. This appeal ensued.

Discussion and Decision

[10] SGS contends that the trial court erred in granting Mullholand's application...