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Under New York and Federal Law, Appraisal Agreements Are Enforced as If They Were Arbitration Agreements

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  • Posted on: May 13 2020

An appraisal is the valuation of property, such as a business, stock in a private company, real estate, collectibles, antiques, or other valuables, by an authorized (and neutral) person. Appraisals are used in many types of transactions. Business men and women typically seek an appraisal when they sell their business, they gift or transfer their ownership interest in the business or property, they make changes to the composition of their business, such as by adding partners or shareholders, they separate from the business, or they are seeking financing for the business.

Sometimes an appraisal is judicially ordered, and sometimes it is contractually bargained for. In today’s article, this Blog examines the process of confirming a contractually required appraisal. Yakuel v. Gluck, 2020 N.Y. Slip Op. 31251(U) (Sup. Ct., N.Y. County May 7, 2020) (here).

The Standard for Confirming or Vacating An Appraisal Award

Under CPLR § 7601, “[a] special proceeding may be commenced to specifically enforce an agreement that a question of valuation, appraisal or other issue or controversy to be determined by a person named or to be selected.” Importantly, “[t]he court may enforce such an agreement as if it were an arbitration agreement.” Id. In that case, the proceeding is to “be conducted as if brought under article seventy-five” of the CPLR. As readers of this Blog know, Article 75 of the CPLR governs confirmation and vacatur of arbitral awards. 

Under the Federal Arbitration Act (“FAA”), appraisals are also considered to be arbitration awards. See, e.g., Milligan v. CCC Info. Servs., Inc., 920 F.3d 146, 152 (2d Cir. 2019) (finding that a binding appraisal process “constitutes arbitration for purposes of the FAA”); Seed Holdings, Inc. v. Jiffy Int’l AS, 5 F. Supp. 3d 565, 576-78 (S.D.N.Y. 2014) (finding that binding price appraisal by accounting firm constituted an arbitration under the FAA).

Since appraisal awards are to be treated as arbitration awards, there is a strong presumption in favor of confirming appraisal awards. For this reason, the court’s role in reviewing an appraisal award is limited. Indeed, like an arbitration award, an appraisal “award must be upheld when the [appraiser] ‘offer[s] even a barely colorable justification for the outcome reached.’” Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 479-80 (2006) (“[A]n arbitrator’s rulings, unlike a trial court’s, are largely unreviewable.”); see also In re Falzone (New York Cent. Mut. Fire Ins. Co.), 15 N.Y.3d 530, 534 (2010). Thus, an appraisal award will not be vacated “for errors of law and fact committed by the [appraiser].” Id. 

“‘A party moving to vacate an arbitration award [or an appraisal award] has the burden of proof, and the showing required to avoid confirmation is very high.’” US. Elecs., Inc. v. Sirius Satellite Radio, Inc., 17 N.Y.3d 912, 915 (2011) (quoting Ecoline, Inc. v. Local Union No. 12 of lnt’l Ass’n of Heat & Frost Insulators & Asbestos Workers, AFL-CIO, 271 F. App’x 70, 72 (2d Cir. 2008)).

Under the FAA, which applies in all cases involving interstate commerce, an arbitration award may be vacated, inter alia, if the “arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy.” 9 U.S.C. § 10(a)(3). Section 10(a)(3) of the FAA has been interpreted to require that arbitrators “give each of the parties to the dispute an adequate opportunity to present its evidence and argument.” Tempo Shain Corp. v. Bertek, Inc., 120 F3d 16, 20 (2d Cir. 1997); see also Bowles Fin. Grp., Inc. v. Stifel, Nicolaus & Co., Inc., 22 F.3d 1010, 1013 (10th Cir. 1994) (fundamentally fair hearing requires, inter alia, an “opportunity to be heard and to present relevant and material evidence and argument before the decision makers”); Yonir Techs., Inc. v. Duration Sys. (1992) Ltd., 244 F. Supp. 2d 195, 208-209 (S.D.N.Y. 2002) (“[a]rbitrators must give both parties to the dispute an opportunity to present their evidence and argument” and “[a]n award can be vacated if an arbitrator refuses to hear material and pertinent evidence”).

New York courts agree that “[t]he right of a party to have appraisers receive all pertinent evidence offered is a fundamental procedural right to which plaintiff was entitled, and its denial by the umpire and the company’s appointed appraiser has been characterized as ‘misconduct, in a legal sense’ which is sufficient … to set aside the award in equity.” Gervant v. New England Fire Ins. Co., 306 N.Y. 393, 399-400 (1954); see also McMahan & Co. v Dunn Newfund I Ltd., 230 A.D.2d 1, 4 (1st Dept. 1997) (“Fundamental unfairness often involves insufficient notice or refusal to receive appropriate evidence.”) (citations omitted); Olympia & York 2 Broadway Co. v. Produce Exchange Realty Tr., 93 A.D.2d 465, 471 (1st Dept. 1983) (finding that party to an appraisal did not have a right to see its opponent’s submission, but noting that each party must have “an opportunity to submit his view to the appraiser”) (citing Matter of Delmar Box Co., 309 N.Y. 60 (1955); Coty Inc. v. Anchor Const. Inc., 2003 WL 139551 (Sup. Ct., N.Y. County Jan. 8, 2003) (finding party was denied a “fundamentally fair hearing” because, among other things, he was “denied the opportunity to be heard” and “the opportunity to present evidence”).

Yakuel v. Gluck

Background

Petitioner Joseph Yakuel (“Yakuel”) and Respondent Andrew Gluck (“Gluck”) founded and jointly owned Agency Within LLC (the “Company”), which was formed pursuant to a Limited Liability Company Agreement dated February 20, 2015 (“LLC Agreement”). Yakuel owned, directly and indirectly, a 65% interest in the Company and was the managing member. Gluck owned the remaining 35%.

In March 2018, the parties amended the LLC Agreement (the “Amendment”). Section 3(a) of the Amendment gave the Company (effectively, Yakuel) the option to repurchase all (but not less than all) of Gluck’s Units for a Purchase Price determined by the Fair Market Value (“FMV”) of those Units. FMV was to be determined by an Appraisal conducted by “a third party appraisal firm, whose appraisal [would] be final and binding on all parties.” The cost of the appraisal would be borne by Gluck and the Company on a 50-50 basis. Section 3(a) further provided that the third-party appraisal firm would be one of the following accounting firms: PricewaterhouseCoopers (“PwC”), Deloitte Touche, Ernst & Young (“E&Y”), KPMG, or BDO Seidman. Yakuel and Gluck had the right to veto any one of the firms within seven (7) days after notification of the Company’s intent to exercise the option and retain an appraiser. Thereafter, with respect to the firms that had not been vetoed, the Company would engage the firm that offered to perform the appraisal at the lowest cost.

Under Section 3(f) of the Amendment, upon exercising the repurchase option, Yakuel had “the right to exclude … Gluck from participating in the affairs of the Company, including without limitation the business operations of the Company, and … entering the business offices of the Company.” Upon such exercise, Gluck’s sole right with respect to the Company and its business operations was to receive the Purchase Price for the Units. Notably, Section 3(f) did not reference Section 3(e) or otherwise indicate that it extended to the appraisal process.

Less than two months after the Amendment, on May 11, 2018, the Company gave Gluck notice that it was exercising its repurchase option. Under the terms on Section 3(e), the Company vetoed E&Y and Gluck vetoed BDO Seidman. The Company then selected PwC to be the third-party appraiser.

In July 2018, Gluck brought an action in New York Supreme Court to rescind the Amendment on the grounds of fraud, want of consideration, and mutual mistake, and alleged breach of contract and fiduciary duty in connection with the appraisal process. As the appraisal drew near, Gluck moved for an injunction on the ground that he was being improperly excluded from participating in the process. The Court (Sherwood, J.) denied Gluck’s motion for a temporary restraining order. With assistance from the Court, the parties entered into a So Ordered stipulation under which Yakuel “agreed in good faith to allow [Gluck] to participate in the Appraisal without waiver of his rights,” and Gluck “agreed to participate in the Appraisal in good faith, without delay or obstruction.” 

Yakuel contended that he held up his end of the bargain and permitted Gluck to participate in the appraisal process, including by providing information and arguments to PwC with respect to valuation. Gluck disagreed. According to Yakuel, Gluck’s “bad faith and litigious approach to the appraisal process eventually caused PwC to halt its work and threaten to quit,” and Gluck’s obstructionist behavior “forced [the Company] to exercise its right under Section 3 of the Amendment to exclude him from the appraisal process.”

Peace between the parties was short lived. The parties returned to court to continue litigating Gluck’s motion to preliminarily enjoin the appraisal. The Court denied that motion. In doing so, the Court found that Gluck had not demonstrated a likelihood of success because “[t]he parties’ contract clearly provides at Section 3(f) that upon exercise of the repurchase contract, the company shall have the right to exclude Gluck from participating in the affairs of the company, from entering into the business offices … and above that in Section 3(e) it provides for the company obtaining an appraisal by a well-known accounting firm.” But, he found, “more important than that is the question of irreparable harm …. [T]he issue really has to do with how much money Mr. Gluck is entitled to … upon the buyout. That’s a claim for money. He could be … completely satisfied by money judgment.” The Court left open the question whether Gluck might have an opportunity to seek a money judgment and made no ruling as to whether an appraisal (which had not yet occurred) would be subject to challenge.

Gluck contended that Yakuel blocked him from participating meaningfully in the appraisal process. He pointed to the engagement letter between the Company (i.e., the client) and PwC, which provided that PwC would “perform[] Services on the basis that the information provided is accurate and complete,” and that PwC “will not audit or verify any information provided to it.” Gluck interpreted this language to prohibit PwC from accepting information from anyone other than Yakuel. Gluck further maintained that the appraisal was “rigged” because he “never had an opportunity to participate, present evidence, or object to false and inaccurate evidence provided by Mr. Yakuel.”

In sum, Gluck contended that the appraisal was not “fair, neutral and balanced” and was fueled by “false and misleading information” submitted by Yakuel that resulted in undervaluing Gluck’s LLC Units by tens of millions of dollars. 

Yakuel filed the action to confirm the appraisal award on August 21, 2019. Gluck crossed-moved to vacate the appraisal award. 

The Court’s Decision

The Court denied the petition and cross-petition. The Court observed that the case “present[ed] an unusual circumstance in which there [was] evidence to suggest that the appraiser/arbitrator (i.e., PwC) wanted to hear Gluck’s side of the story, and repeatedly asked for that opportunity, but may have been hindered by Yakuel.” Slip Op. at *9. The Court rejected “Yakuel’s contention that Section 3(f) of the Amendment gave him the unfettered right to exclude Gluck from presenting evidence during the appraisal process” as “not [being] persuasive.” Id. The Court reasoned “[t]hat provision limits Gluck from being involved in the business or coming to the corporate office. It [did] not, on its face, suggest any agreed upon limitation on Gluck’s ability to tell his side of the story on the significant question of the value of his Units.” Id. Nor, said the Court, did Section 3(e), “which governs the dispute resolution process.” Id.

The Court explained that the “core question is whether the facts support Gluck’s assertion that he did not have a fair opportunity to present his case.” Slip Op. at *10. The Court found that “[t]he record [was] not sufficiently clear at [the] stage [of proceedings] to permit a decision on this question one way or the other.” Id. Consequently, the Court denied the motion to confirm and to vacate the appraisal award.

Takeaway

Vacating an arbitration award is often difficult. This is especially so given the strong presumption in favor arbitration awards and the limited role courts take in reviewing them. Nevertheless, when the facts are such that vacatur is appropriate, courts will not hesitate to do so. In Yakuel, however, the record was not developed enough to make a decision. But it was developed enough for the Court to seek more evidence in order to rule one way or the other.

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