Legal Opinions - Court of Special Appeals, Maryland: February 11,

Daily Record, The (Baltimore), Feb 11, 2008

Contracts

Agreement to arbitrate

BOTTOM LINE: Parties to a purchase agreement with an arbitration provision were required to arbitrate a disagreement based upon an "Earn Out" clause.

CASE: Essex Corp. v. Susan Katharine Tate Burrowbridge, LLC, et. al., No. 27 (September Term, 2007) (decided Jan. 31, 2008) (Judges EYLER, Woodward, Murphy, (specially assigned)).

FACTS: Essex entered into a 70-page "Purchase Agreement" with Tate to acquire The Windemere Group, LLC ("Windemere"), Tate's wholly owned subsidiary. The purchase price set forth in that agreement was comprised of several elements, the last of which was payment on May 31, 2006, of an "Earn Out, less any amounts for which [Essex] exercises its right of offset pursuant to Section 12 of this Agreement."

Section 12 of the Purchase Agreement, entitled "Purchaser's Right of Offset," granted Essex "the right and option, but not the obligation, to offset and reduce the Earn Out" by certain sums more specifically described in subsections (a), (b), (c), and (d).

Closing went forward as scheduled on February 28, 2005. The first part of the purchase price, $44,157,000, was paid that day. That and the other parts of the purchase price except the Earn Out were paid as required and are not in dispute.

Fourteen months after the closing, on April 18, 2006, Essex retained an independent accounting firm to calculate the Earn Out that was due to be paid on May 31, 2006.

On May 5, 2006, Tate, by counsel, wrote to Leonard E. Moodispaw, President and Chief Executive Officer of Essex, stated that, based upon calculations made by accountants for Essex "every month during the period of the Earn Out," "the EBITDA achieved by Windemere exceeded $11.3 million for the 12-month period ended [sic] February 28, 2006."

That figure, counsel went on to observe, was greater than the EBITDA figure of $8,500,000 that "would provide the maximum Earn Out payment" of $30,000,000, under Section 1.1. Tate requested the full Earn Out payment.

That letter prompted a written response from Mr. Moodispaw, on May 17, 2006, in which he pointed out that the demand was premature, that Essex had retained an independent accountant to determine the Earn Out amount, and that he (Mr. Moodispaw) did not agree with certain comments by counsel for Tate about how the Earn Out was to be computed under the Purchase Agreement. Essex claimed the Earn Out was $13,123,966.

There followed a series of letters and exchanges of documents between counsel for the parties, regarding how to calculate the Earn Out. They were not able to resolve their dispute over the amount of the Earn Out or about the documents needed in order to determine the amount of the Earn Out.

On September 15, 2006, Tate filed the instant suit for breach of contract. In Count I, it sought access to documents and other materials pursuant to the Purchase Agreement. In Count II, it alleged that Essex "failed to pay [Tate] the full amount of the Earn Out," pursuant to Section 2.2 of the Purchase Agreement.

In response to the complaint, Essex filed a petition to compel arbitration, invoking Section 12 of the Purchase Agreement, and a motion to stay or dismiss without prejudice pending arbitration. Tate filed an opposition.

The court denied the petition to compel arbitration and motion to dismiss or stay. Essex appealed. The court remanded the case with and order to the lower court to compel the parties to participate in arbitration.

LAW: The resolution of the jurisdictional issue was governed by Town of Chesapeake Beach v. Pessoa Constr. Company, Inc., 330 Md. 744 (1993), and NRT Mid-Atl. Inc. v. Innovative Props., Inc.,144 Md. App. 263 (2002). The Pessoa case was a dispute between a contractor and a town that arose out of their construction contract, which contained a binding arbitration clause.

The contractor sued the town and filed a motion to stay pending arbitration. The court granted the motion to stay, and the contractor then filed its demand for arbitration. The town appealed, and this Court dismissed the appeal as not taken from a final judgment.

On certiorari review, the Court of Appeals held that the order denying the petition to stay arbitration was appealable. It emphasized that a petition to stay arbitration can be brought under the Maryland Arbitration Act as a discrete claim. See CJ [section] 3- 208.

The Court further observed, "[t]he relief sought by the moving party in such an action [to stay arbitration] does not bear on the merits of the underlying claim; it relates solely to the forum to be used for the resolution of that dispute." Pessoa, supra, 330 Md. at 751.

Reasoning that the town's petition to stay arbitration, although filed in the pending circuit court action between the parties, constituted a separate claim under CJ [section] 3-208, and that that claim had been "completely terminated" by the court's denial, the Court exercised its discretion to enter a final judgment on that claim, under Rule 8-602(e)(1).

In NRT, the Court applied the principle established in Pessoa to an interlocutory order denying a motion to compel arbitration, under CJ [section] 3-207(c), filed in a tort action between a listing real estate firm and a cooperating real estate firm.