In the recent decision of FBI Wind Down Inc. Liquidating Trust, by and through Alan D. Halperin, as Liquidating Trustee, v. Heritage Home Group, LLC, et al., Adv. Pro. No. 15-51899 (CSS) (Bankr. D. Del. Sept. 15, 2016) Judge Sontchi considered whether motion to compel the arbitration of several claims. For the reasons set forth below, the Court denied the motion.
Heritage Home Group LLC (“Heritage”), purchased substantially all of the Debtors’ assets pursuant to a Sale Order. The Second Amendment to the Asset Purchase Agreement (the “Second Amendment” and the “APA”) required Heritage and the Sellers to engage in a purchase price reconciliation process in the sixty days after Closing. The parties were unable to agree on the proper purchase price reconciliations. Thus, the Trustee, as successor-in-interest to the Sellers, filed the instant adversary proceeding. The Trustee asserted that, under the purchase price reconciliation provisions in the APA, Heritage owes the Liquidating Trust approximately $13,000,000. Heritage denied the Trustee’s accounting and asserts that the Liquidating Trust owes Heritage approximately $8,000,000. The merits of the parties’ dispute has not yet been adjudicated because § 3(a) and § 3(b) of the Second Amendment, which govern the reconciliation process, each contain an Accounting Arbitration Clause (the “Arbitration Clause”).
The parties have raised two disputes that might be subject to mandatory arbitration: (i) whether Heritage has the right to retain “Auction Clearing House Electronic Receipts & Deposits” (“ACHE-R/D”) earned by the Sellers shortly before Closing; and (ii) what accounting method—GAAP or the Sellers’ traditional practices—must be applied in calculating the purchase price reconciliations.
The parties disputed whether under §§ 3(a) and 3(b) of the Second Amendment, the disputes must be submitted to the Accounting Arbitrator for resolution. In objecting to the motion, the Trustee argued that the Court must first determine several “threshold legal issues” before these claims may be submitted to arbitration. The Trustee asserted that the issues raised in his Complaint (1) are outside the scope of the Arbitration Clause and (2) are issues over which the Court expressly retained jurisdiction in the Sale Order.
The Court interpreted the Arbitration Clause as follows: (1) disputes over the calculation of reconciliation items, including disputes over how a set of accounting principles must be applied, are arbitrable while (2) disputes over the interpretation of the APA, including disputes over what rules the APA places on the Accounting Arbitrator, are not arbitrable. The Court has determined that this interpretation is the most reasonable—and only reasonable—interpretation after engaging in a three-step interpretative process.
The Court examined the parties’ disputes to determine if either dispute falls within the narrow scope of the Arbitration Clause. The Court found that because both disputes are clearly disputes over the proper interpretation of the APA, the Court finds that neither dispute is arbitrable. As a result, the Court denied Heritage’s motion to compel arbitration.
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.