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Arbitration losers fail to vacate $3 million award

Where an arbitrator decided that the sellers of a company owed the buyers over $3 million, and the sellers failed to show the arbitrator exceeded its power or manifestly disregarded the law, the arbitration award was confirmed.

Background

On Nov. 19, 2019, Glenn Vogel and Doug Lee entered into an agreement with Nathan Hibler and defendant Gracias Juan LLC to purchase a 91% interest in Espire Services LLC. Following closing, the buyers sent an updated post-closing statement that estimated that the sellers owed the buyers $4,886,634 to account for the difference between Espire’s actual net working capital on the closing date and the parties’ $750,000 estimate of Espire’s net working capital.

Because the parties were unable to come to an agreement as to the amount of that payment, they proceeded to arbitration, as required by their Membership Interest Purchase Agreement, or MIPA. RSM US LLP, whom the parties retained to arbitrate this dispute, ultimately concluded that the sellers owed the buyers $3,097,954. The buyers have moved to confirm the arbitration award while the sellers have moved to vacate it.

Statute

The parties dispute what law governs resolution of this arbitration: the Federal Arbitration Act, or FAA, or the Virginia Uniform Arbitration Act, or VUAA. This dispute is significant because the seller’s argument that RSM’s award represented a manifest disregard for the law is a valid basis to challenge an arbitration award under federal law, but is not a valid basis to challenge an arbitration award under Virginia law.

Although the buyers are correct that the MIPA contains a general choice of law provision specifying that Virginia law should apply to disputes arising from the MIPA, the Fourth Circuit has held that “a contract’s general choice-of-law provision does not displace federal arbitration law if the contract involves interstate commerce.” The parties agree that the MIPA involved interstate commerce. Therefore, it is clear that the FAA, and not the VUAA, applies to this dispute.

Scope

Seller’s first argument is that RSM exceeded its power during the arbitration because RSM considered figures presented by the buyers which were not presented by the buyers in the Jan. 7, 2020, post-closing statement. This argument strains credulity and contradicts the plain language of the contract, as the MIPA expressly authorizes the arbitrator to “determine the Net Working Capital as of the Closing Date and the Post-Closing Adjustment Payment.” Nowhere in the MIPA did the parties agree that the arbitrator was required to ignore updated estimates of Espire’s finances not known at the time of the initial post-closing statement.

The seller’s argument is also undermined by the seller’s own behavior during arbitration, as it submitted to RSM various items to include in net working capital, including the proceeds of Espire’s $6,000,000 loan, where this item was not included in the post-closing statement. Thus, RSM did not exceed its authority under the MIPA, and thus there is no basis to vacate RSM’s arbitration award on this ground.

Manifest disregard

The seller’s second argument is that RSM manifestly disregarded the law in its application of generally accepted accounting principles, or GAAP, principles to calculate Espire’s net working capital on the closing date. Specifically, the seller argues that RSM should have, but did not, determine that the $6,000,000 loan taken by Espire to finance the buyers’ purchase of Espire qualified as a current asset of Espire as of the closing date.

This argument is erroneous on its face. The $6,000,000 loan was taken by Espire for the purpose of funding the sale of Espire. On the closing date, the proceeds of this loan were transferred from Espire to the buyers, and then remitted from the buyers to the sellers. It makes no sense to include this sum in Espire’s net working capital.

The seller relies on GAAP provision ASC 210-10-45-1(d), arguing that that provision required RSM to include the loan proceeds in Espire’s net working capital. But this provision does not provide that such items are always included in current assets. Moreover, there is little doubt that RSM is in a better position to apply GAAP principles to evaluate accurately Espire’s finances.

Seller’s motion to vacate the arbitration award denied. Buyers’ motion to confirm the arbitration award granted.

Vogel v. Gracias Juan LLC, Case No. 1:21-cv-1355, Aug. 9, 2022. EDVA at Alexandria (Ellis). VLW 022-3-344. 16 pp.

VLW 022-3-344

Virginia Lawyers Weekly