Opinion
Case No. 2:03-CV-565 TS
September 18, 2003
ORDER DENYING, IN PART, MOTIONS TO DISMISS FILED BY MPI AND THE MEDIANEWS DEFENDANTS AND SCHEDULING ORDER
This matter came before the court on August 28, 2003, for hearing on the Motions to Dismiss filed by Management Planning, Inc. (MPI) and by MediaNews Group, Inc. and Kearns-Tribune. MediaNews is Kearns-Tribune's owner and where they are referred to jointly, it will be as the MediaNews Defendants.
I. Background
On June 11, 2003, MPI issued an appraisal of the value of certain assets for the purpose of setting the Exercise Price to purchase The Salt Lake Tribune newspaper and related assets (the Tribune Assets) under a July 31, 1997, Option Agreement between Plaintiff and Kearns-Tribune. Plaintiff, Kearns-Tribune, Media-News, and others are engaged in disputes over the validity and exercise of that Option Agreement in a contentious related case, Salt Lake Tribune Publishing, Inc. v. ATT Corporation, Civil No. 2:00-CV-936 TS (the Tribune case). The Tribune case has been pending in this court since December 2000, and is scheduled to begin trial on November 3, 2003. The parties are familiar with the history of the Tribune case and it need not be repeated herein.
The Option Agreement provides: "This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without reference to rules governing conflicts of law." The Option Agreement provides that, if the parties cannot agree on the Exercise Price, then each shall obtain an appraisal, and if those appraisals are more than a certain percentage apart in value:
then such two Appraisers shall jointly select a third Appraiser (who shall be a person or entity who is not then providing advisory services to [the parties]) and, in such case the Fair Market Value of the Tribune Assets shall be equal to the average of the two closest Appraised Values reported by the three Appraisers, provided, however, that if the highest and the lowest of such three Appraised Values differ from middle by an equal amount, then the Fair Market Value of the Tribune Assets shall be equal to such middle determination.
Complaint, Ex. A ¶ 2(b) (underlined emphasis in original).
The Option Agreement provides that the third appraiser shall deliver its report "as early as possible and in any event within 20 days of its selection." Id., ¶ 2(c). It further provides as follows:
(d) Each determination of the Fair Market Value of the Tribune Assets by the agreement of [Kearns-Tribune] and [Plaintiff] or in accordance with the appraisal provisions of this paragraph 2 shall be final, binding and conclusive.Id., ¶ 2(d) (underlined emphasis added).
The appraisals obtained by Plaintiff and Kearns-Tribune were sufficiently far enough apart to require a third appraiser under the Option Agreement. Plaintiff and the MediaNews defendants hired MPI, a firm based in Princeton, New Jersey, to perform the Third Appraisal under paragraph 2(b) of the Option Agreement by means of an acceptance of MPI's November 27, 2002, Proposal Letter agreeing to perform "an independent appraisal of the Tribune Assets as defined in the Option Agreement." Complaint Ex. B. The Proposal Letter informs the parties that MPI's valuation practice is national in scope, that MPI has sales offices in seven cities in seven states, that "all of [its] valuation work [is] done in Princeton"; and that its draft copy of the report will be made available to Plaintiff's and the MediaNews Defendants' appraisers. Complaint, Ex. B, 2-3. The Proposal Letter further provides as follows:
Methodology
We would value Salt Lake Tribune on a controlling interest basis employing such methodology(ies) as we determine in our professional judgment in accordance with our usual practice.
Our analyses, opinions and conclusions will be in conformity with the Uniform standards of Professional Appraisal Practice of the Appraisal Foundation and the Principals of Appraisal Practice and Code of Ethics of the American Society of Appraisers, and the terms of the Option Agreement. If MPI determines that the terms of the Option Agreement preclude an appraisal in accordance with the above industry standards and principles, then MPI will report this conflict to the parties, and the parties agree to then seek guidance from the Court to resolve that conflict.
Hereinafter Professional Appraisal Standards.
Complaint, Ex. B, at 2-3 (underlined emphasis added).
Upon the issuance of the draft report, Plaintiff filed suit against MPI in a New Jersey state court seeking to prevent the issuance of the final draft because it contended that MPI failed to follow the Professional Appraisal Standards as set forth in the Proposal Letter. The New Jersey case was eventually dismissed. On June 11, 2003, MPI issued its final draft appraisal in the amount of $331 million (the Third Appraisal).
On June 24, 2003, Plaintiff filed the present case seeking to set aside the Third Appraisal.
II. The Parties' Positions
Plaintiff's Complaint includes claims of breach of contract and breach of fiduciary duty based on its position that the Proposal Letter and acceptance created a new contract that MPI subsequently breached by failing to follow Professional Appraisal Standards. Plaintiff also seeks declaratory and injunctive relief setting aside the Third Appraisal; prohibiting it from being used to calculate the Exercise Price under the Option Agreement; and seeking a new valuation date under the Option Agreement. In the alternative, although Plaintiff strongly disagrees that the Third Appraisal is an arbitration, in the event it is held to be an arbitration, the Complaint's Fifth Claim for Relief seeks to vacate and set aside the arbitration award pursuant to the Federal Arbitration Act (FAA), 9 U.S.C. § 1 through 16.
The MediaNews Defendants move to dismiss the Complaint because they contend that the Option Agreement's appraisal process is an arbitration under Delaware law and that no basis exists to vacate the exercise price. The MediaNews Defendants also seek to dismiss because, even if the Third Appraisal is determined not to be an arbitration, the Option Agreement provides that it is to be "final, binding and conclusive" and is not subject to judicial challenge. They also contend that there is no basis either to set aside the Third Appraisal due to delay or to change the valuation date.
MPI moves to dismiss for the following reasons: the Third Appraisal is an arbitration; MPI is entitled to arbitral immunity; the Federal Arbitration Act (FAA) applies and the Complaint fails to state a valid challenge under the FAA; and MPI is entitled to immunity because it was a neutral party retained to resolve a dispute related to ongoing legal proceedings.
In response to the Motions to Dismiss, Plaintiff contends that the Option Agreement's appraisal provisions are not an arbitration; that federal law, not state law, determines what is an arbitration within the meaning of the FAA; that MPI is not entitled to immunity; that, even if Delaware law applies, the Third Appraisal is not an arbitration under Delaware law; and the MediaNews Defendants' refusal to transfer all Tribune Assets and the delay in closing require that the appraisal process be started anew.
III. Standard of Review
Defendants move to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) for lack of jurisdiction and under Rule 12(b)(6) for the failure to state a claim. The parties have argued the motion primarily under Rule 12(b)(6).The standard for considering a Rule 12(b)(6) motion is as follows:
[A]ll well-pleaded factual allegations in the amended complaint are accepted as true and viewed in the light most favorable to the nonmoving party. GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997). "A 12(b)(6) motion should not be granted `unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Id. (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). "The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted." Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir. 1991).Sutton v. Utah State School for the Deaf and Blind, 173 F.3d 1226, 1236 (10th Cir. 1999).
In addition to the complaint, because the exhibits attached to the complaint are "referred to in the complaint," "central" to Plaintiff's claims, and "the parties do not dispute the documents' authenticity," the court will consider those exhibits. Butler v. Rio Rancho Public Schools Bd. of Educ., — F.3d —, 2003 WL 22005938 * 2 (10th Cir. 2003) (quoting Jacobsen v. Deseret Book Co., 287 F.3d 936, 941 (10th Cir. 2002). The court "determine[s] the legal effect of [those exhibits] by their own terms rather than by the allegations in the complaint." Id. (internal quotations omitted).
The MediaNews Defendants referenced the Third Appraisal in their Motion to Dismiss and moved to file a copy under seal as an exhibit to their Motion. It is undisputed that the Third Appraisal was issued on June 11, 2003 and that Plaintiff disputes its opinion that the value of the Tribune Assets is $331 million. Except for these undisputed facts, the court will not consider the Third Appraisal for purposes of deciding the present motions. However, the court will grant the MediaNews Defendant's Motion to file the Third Appraisal as an exhibit under seal.
IV. Analysis
Defendants contend that the Third Appraisal is an arbitration and that this court must look to state law to determine what an arbitration is for purposes of the FAA. They contend that Delaware provides the applicable state law. Defendants rely on such cases as Hartford Lloyd's Insurance Company v. Teachworth, 898 F.2d 1058 (5th Cir. 1990). In Hartford, the Fifth Circuit followed an earlier Ninth Circuit case, Wasyl, Inc. v. First Boston Corp., 813 F.2d 1579, 1582 (9th Cir. 1990) and looked to state law to determine whether an appraisal was an arbitration for purposes of the FAA. In Hartford, applying Texas law, the court found that insurance appraisal provisions were not an arbitration agreement. 898 F.2d at 1063. In Wasyl, the court applied California's arbitration statute to find that an Option Agreement's appraisal provision was an arbitration for purposes of the FAA. 813 F.2d at 1581. In Portland Gen. Elec. Co. v. U.S. Bank Trust Nat'l Ass'n as Trustee for Trust No. 1, 218 F.3d 1085, 1091 (9th Cir. 2000), despite their questioning of the correctness of the rule, the panel followed Wasyl as controlling case law. 218 F.3d at 1091-92. In Portland, the Ninth Circuit applied Oregon law, under which an appraisal is not an arbitration. 218 F.3d at 1090.
Plaintiff contends that federal law determines the issue, relying on Kelly v. U.S., 19 Cl. Ct. 155, 162 (Cl.Ct. 1989) (interpretation of lease of property to United States construed under general federal contract law). At issue in Kelly were a lease and a modified lease to the federal government. Those contracts at issue in Kelly did not contain a choice of law provision, specifying state law. 19 Cl. Ct. at 162 n. 11. There are sound policy reasons for construing lease agreements with the federal government and other federal contracts under general federal contract law. 19 C.Ct. at 162. Those same considerations are not applicable to the present case because it does not involve a federal contract.
This court agrees with and will follow Hartford.
Issues of arbitrability are questions of federal substantive law. However, the FAA does not define, and the Supreme Court has not defined, what constitutes an arbitration within the coverage of the Act.
The court [in Wasyl] reasoned that since state law only preempted to the extent necessary to protect the achievement of the aims of the FAA, in circumstances such as these a court should be able to look to state law provided it is not inconsistent with the goals of the FAA.Hartford, 898 F.2d at 1062.
The parties disagree regarding the applicable state law. The MediaNews Defendants contend that the law of Delaware applies. Plaintiff contends that the law of New Jersey applies. Although Plaintiff argues that New Jersey law applies to MPI's proposal letter, it could be as well argued that Utah law applied since the proposal letter was negotiated from Utah to perform services in Utah.
The choice of applicable state law is important in this case because there is a split of authority on whether an appraisal should be treated as an arbitration. For example, Utah and New Jersey follow the majority position that it is not. Miller v. USAA Casualty Ins. Co., 44 P.3d 663, 672-3 (Utah 2002) (although appraisal may be used as another form of alternative dispute resolution, it is not an arbitration and therefore an appraisal determination is not necessarily binding and conclusive in court and Utah's arbitration act does not control); Levine v. Wiss Co., 478 A.2d 397 (N.J. 1984) (court-appointed accountants selected to value assets do not function as arbitrators and therefore are not entitled to immunity).
As noted above, the Option Agreement, at § 15, clearly specifies that it is to "be governed by, and construed in accordance with, the laws of the State of Delaware, without reference to rules governing conflicts of law." Complaint, Ex. A. § 15 at 6. The Third Appraisal is at the heart of the appraisal process that is the dispute resolution mechanism specified in the Option Agreement. Id. § 2. The Proposal Letter references, incorporates, is in furtherance of, and performs a task required by and defined in, the Option Agreement. Id., Ex. B at 3. Thus, the court finds and concludes that the Third Appraisal, as mandated by the Option Agreement, must be governed by and construed in accordance with Delaware law. To hold otherwise would mean that the dispute resolution process chosen by the Option Agreement would not be construed in accordance with, and governed by, the laws of Delaware, as the parties specifically agreed. Instead it would mean that it could be construed in accordance with, and governed by, the law of whatever jurisdiction where the selected third appraiser happened to base its operations. Avoidance of such uncertainty in the controlling law is the very reason for choice of law provisions.
Plaintiff contends that, even if Delaware law applies, the appraisal is not an arbitration. The Delaware Supreme Court construed a similar appraisal provision contained in an insurance contract in Closser v. Penn Mutual Fire Ins. Co., 457 A.2d 1081, 1087 (Del. 1983). That insurance contract provided that, if the insured and the insurance company could not agree on the value of a loss, then each should select an appraiser. If those two appraisers could not agree, then the two would submit their appraisals to a disinterested "umpire" selected by the two appraisers. 457 A.2d at 1084-85. If the two appraisers could not agree on an umpire, one would be selected by the court of record. Id. The Closser court held:
Thus, while the policy's appraisal provisions and its suit limitation provisions may well serve entirely different purposes, the former provisions amount to an alternative form of dispute resolution, short of litigation. Further, since the policy states that "an award in writing, so itemized, of any two when filed with this Company shall determine the amount of actual cash value and loss", we construe the appraisal provisions of the policy, if invoked, to provide a mandatory form of arbitration, precluding recourse to the courts.Closser, 457 A.2d at 1087.
Plaintiff attempts to distinguish Closser on several grounds, including that the appraisal clause at issue in Closseruses the term "umpire," and the clause at issue in the present case does not. The court finds the attempt to distinguish Closser to be unpersuasive.
The cases relied upon by Plaintiff do not undermine Closser. In an unpublished case, Morn's, Nichols, Arsht Tunnel v. R-H International, Ltd., 1987 WL 33980 (Del.Ch. 1987), the court cites a 1970 Delaware Chancery case for the fact that an appraisal is not the equivalent of an arbitration, Id. *4 (citing Collison v. Deisem, 265A.2d 57, 59 (Del.Ch. 1970)), and fails to cite Closser, the more recent controlling case. As an unpublished case from the Court of Chancery, Mom's does not control. Northeast Financial Corporation v. Inc. Co. of North America, 757 F. Supp. 381 (D. Del. 1991) (finding that despite the later Moms decision by Delaware's Court of Chancery, Closser still controls).
In another case relied upon by Plaintiff, DMS Properties-First, Inc. v P.W. Scott Ass., Inc., 748 A.2d 389, 389-90 (Del. 2000), the issue was whether one party could enforce an arbitration clause contained in an agreement to which it was not a party, although it had subsequently informally taken over performance of the obligations under the agreement. Thus, DMS involved an issue of arbitrability-whether the parties agreed to arbitrate and therefore arbitration was mandatory. It was in the context of the issue of arbitrability that the DMS court made the statement relied upon by Plaintiff: "A party cannot be forced to arbitrate the merits of a dispute, however, in the absence of a clear expression of such intent in a valid agreement." 748 A.2d at 391. In the present case, the parties do not dispute that the appraisal process is mandatory under the Option Agreement and have already engaged in that process. Thus, there is no issue of arbitrability in the present case. Therefore, DMS and other cases asserting that, in the absence of an agreement to arbitrate, a party cannot be forced to arbitrate, are inapposite.
In PVI, Inc. v. Ratiopharm, 253 F.3d 320 (8th Cir. 2001), the Eighth Circuit applies Delaware law and questions whether that DMS statement, quoted above, means that Delaware law is unclear on whether a similar appraisal process is an arbitration. However, as noted above, recognizing that the quote's context is the different issue of arbitrability reveals that the Delaware law, as stated in Closser, remains clear.
Not only does the present case not involve the arbitrability issue presented in DMS, it is very unlikely that the Delaware Supreme Court would have overruled Closser in a case such as DMS, which does not contain any reference to Closser. Therefore, the court finds that, under Delaware law, the Third Appraisal is an arbitration.
Arbitrability is determined as a matter of federal law.
Once it is determined that the appraisal is an arbitration, the court must determine if the FAA applies. The FAA applies if the Option Agreement is a "contract evidencing a transaction involving commerce." 9 U.S.C. § 2. In Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265 (1995), the United States Supreme Court accepted a "commerce in fact" reading of the FAA's "evidencing a transaction involving commerce" language "as insisting that the `transaction' in fact "involv[e] interstate commerce, even if the parties did not contemplate an interstate commerce connection." The Option Agreement provides an option for Plaintiff, a Utah limited liability company, to purchase the Tribune Assets, from Defendant Kearns-Tribune, now a Delaware limited liability company. Thus, the Option Agreement "is a contract evidencing a transaction involving commerce" within the meaning of the FAA.
Tribune Assets are those used, held for use or usable in connection with the operation and publication of The Salt Lake Tribune newspaper. Complaint, Ex. A § 1.
Under the FAA, an attempt to overturn an arbitration should be by a Motion to Vacate. 9 U.S.C. § 10. Section 12 of the FAA provides that a notice of a motion to vacate, modify or correct an award must be served "within three months after the award is filed or delivered." 9 U.S.C. § 12. Although Plaintiff's Fifth Claim for Relief seeks, in the alternative, to vacate and set aside the arbitration award if the appraisal is held to be an arbitration, during argument Plaintiff contended that it required the full three months to file its Motion to Vacate and set forth its position in sufficient detail. The MediaNews Defendants agreed to shorten the time for their Opposition and at the close of the hearing the court set a briefing schedule. See 9 U.S.C. § 6 (application "shall be made and heard in the manner provided by law for the making and hearing of motion") and DUCivR 7-1(b)(3) (attorneys may stipulate to shorter briefing periods for motions).
V. Conclusion
The Third Appraisal is an arbitration subject to the FAA. Plaintiff represents it will file a separate Motion to Vacate that arbitration. It is therefore
ORDERED that the Motions to Dismiss filed by Management Planning, Inc. (MPI) and by MediaNews Group, Inc. and Kearns-Tribune are GRANTED, IN PART, insofar as the court finds that the Third Appraisal issued pursuant to Section 2 of the Option Agreement is an arbitration award subject to the FAA. It is further
ORDERED that the Motions to Dismiss filed by Management Planning, Inc. (MPI) and by MediaNews Group, Inc. and Kearns-Tribune are otherwise DENIED, without prejudice. It is further
ORDERED that Plaintiff shall file its Motion to Vacate by September 11, 2003, Defendants shall file their Opposition by September 18, 2003 and Plaintiff shall file any Reply by September 22, 2003. It is further
The court notes that Plaintiff timely filed its Motion to Vacate as Civ. No. 2:03CV-785 TS.
ORDERED that hearing on Plaintiff's Motion to Vacate shall be heard on September 29, 2003 at 2:30 p.m.