Source: http://la.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20190802_0001226.WLA.htm/qx
Timestamp: 2020-05-30 23:00:02
Document Index: 331708696

Matched Legal Cases: ['§2', '§2', '§18', '§18', '§2', '§2', '§2']

FindACase™ | Hannie Development Inc. v. Colonial Oaks Assisted Living Lafayette, LLC
Hannie Development Inc. v. Colonial Oaks Assisted Living Lafayette, LLC
HANNIE DEVELOPMENT INC., ET AL.
COLONIAL OAKS ASSISTED LIVING LAFAYETTE, LLC, ET AL.
Pending here is the Application to Modify or Alternatively Partially Vacate Arbitration Awards [Doc. No. 1] filed by Hannie Development, Inc., and Cedar Crest, LLC (collectively “Sellers”). Colonial Oaks Assisted Living Lafayette, LLC, and Colonial Oaks Memory Care Lafayette, LLC (collectively “Buyers”) have filed an opposition [Doc. No. 5]. Sellers have filed a reply [Doc. No. 10].
For the following reasons, the Application is DENIED.
This is a dispute over funds held in escrow following the purchase and sale of two assisted living facilities in Lafayette: the Rosewood Retirement & Assisted Living Center and the Cedar Crest Personal Memory Living facility. Sellers and Buyers executed separate but materially identical Asset Purchase Agreements (the “APAs”) relating to each facility. The APAs provide that 4% of the purchase price for each facility would be held in escrow “pursuant to the terms and conditions of a Holdback Escrow Agreement.” [Doc. Nos. 1-2, and 1-3]. Accordingly, the parties also entered into separate but materially identical Holdback Escrow Agreements (the “HEAs” or “Escrow Agreements”) [Doc. Nos. 1-4, 1-5].
Buyers placed a total of $660, 000 in escrow. The escrowed funds -sometimes identified as the “Holdback Amounts” (the term used in the APAs) and the “Post-Closing Escrow Funds” (the term used in the HEAs) -were to serve two purposes under the parties&#39; agreements. The relevant purpose for this Application is the one outlined in §2 of the HEAs. Section 2 provides, in relevant part, that the escrowed funds “shall be retained by the Escrow Agent . . . in the event that any claim, action or suit is then pending by Buyer against Seller for breach of any Survival Period Obligations (a ‘Post-Closing Claim&#39;) . . . as security for the performance of the Survival Period Obligations.” [Doc. No. 1-4 at p. 2; Doc. No. 1-5 at p. 2]. The HEAs define “Survival Period Obligations” as including “duties, obligations and liabilities of Seller under the [APAs] that survive the Closing.” [Doc. No. 1-4 at p. 1; Doc. No. 1-5 at p. 1].
In line with §2 of the HEAs, §18.8(b) of the APAs provides for disbursement from the escrowed funds “[w]ith respect to Losses claimed by Buyer.” [Doc. No. 1-2 at p. 57; Doc. No. 1-3 at p. 57]. Section 18.8(a) of the APAs states that such disbursement from the escrowed funds “shall constitute the sole and exclusive remedies (except with respect to Losses arising from fraud, bad faith or intentional misconduct on the part of any Party in connection with the transactions contemplated by this Agreement).” [Id]
Within the one-year period that followed the closing of the transactions at issue, Buyers asserted four claims against Sellers which Buyers contended would be covered, in whole or in part, by disbursements from the escrowed funds. Sellers denied liability as to each claim. This triggered the dispute resolution provisions contained in the HEAs. Those provisions apply broadly to “any dispute, claim, or controversy of any kind between” Sellers and Buyers “arising out of or relating to the performance, meaning or interpretation of any provision of this Agreement or any document executed in connection with this Agreement, whether such claim sound in contract or tort ....” [Doc. No. 1-4 at 4, 5; Doc. No. 1-5 at 4, 5]. The dispute resolution provisions call for arbitration of any dispute which the parties cannot resolve through negotiation or mediation, and provide that the arbitration will be subject to “the commercial dispute resolution procedures of the American Arbitration Association.” [Doc. No. 1-4 at 5, 6; Doc. No. 1-5, at 5, 6].
In accordance with the dispute resolution provisions of the APAs, the parties attempted to mediate their dispute. After mediation failed, Sellers initiated arbitration by filing a demand seeking payment of the entire amount held in escrow. [Doc. No. 1-6]. Buyers responded by filing an “Answer and Statement of Claims/Counterclaim” in which they outlined each of the four claims that they previously had asserted against Sellers. [Doc. No. 1-7].
Of Buyers&#39; claims, the one most relevant to Sellers&#39; Application is that Sellers knowingly breached certain representations and warranties contained in the APAs themselves pertaining to Sellers&#39; and the facilities&#39; compliance with applicable health care laws. Sellers moved to dismiss that claim (among others) from the arbitration, arguing that it amounts to a fraud claim and that the exception in APA §18.8(a)&#39;s “exclusive remedy” provision for Losses arising from “fraud, bad faith or intentional misconduct” renders it non-arbitrable. On November 7, 2018, the Arbitrator issued Interim Order No. 5. [Doc. No. 1-8], ruling that Buyers&#39; breach of representations and warranties claim are not arbitrable, reasoning “it is a fraud claim which does not fall within the APA Section 18 exclusive remedy provisions.” [Id. at p.3]
Buyers then filed a separate lawsuit in this Court asserting their breach of representations and warranties claims, Colonial Oaks Assisted Living Lafayette, LLC et al. v. Hannie Development, Inc. et al, No. 6:18-CV-01606.
Next the issue arose in the arbitration proceeding as to the disposition of that portion of the escrowed funds that was not necessary to cover Buyers&#39; claims that remained in arbitration. After the entry of Interim Order No. 5, Sellers requested that the Arbitrator order the release of $300, 000 from escrow. [Doc. No. 5-1]. Sellers argued that Interim Order No.5 contained a finding that Buyers&#39; breach of representations and warranties claims “were excluded from the HEAs.” [Id.] Sellers contended that this purported finding meant that “the escrowed proceeds are not available to satisfy these claims.” [Id.]
Buyers responded by arguing that the release to Sellers of any portion of the escrowed funds would be improper under the HEAs, particularly §2. On December 14, 2018, the Arbitrator issued Interim Order No. 7, in which the Arbitrator noted the “clear” existence of “a dispute between the parties . . . on the release of any escrow funds.” [Doc. No. 5-2]. He deferred ruling on Sellers&#39; request for a partial release of the escrowed funds until the arbitration hearing on the merits and stated that “[t]he Final Award will contain a provision on the release of escrow funds.” [Id.].
The arbitration hearing on the merits took place on January 22-23, 2019. In their Pre-Hearing Brief, Sellers listed “[w]hether an arbitration order to release escrowed proceeds is affected by Buyers&#39; federal suit” as one of the issues to be decided [Doc. No. 5-3]. Buyers contend this signaled Sellers&#39; agreement that the issue was properly submitted to the Arbitrator. Sellers continued to rely on their argument that the Arbitrator&#39;s determination that Buyers&#39; breach of representations and warranties claims are not arbitrable meant that the escrowed funds are not available to satisfy those claims. [Id.]
On April 25, 2019, the Arbitrator issued his Partial Final Award. [Doc. No. 1-9] The Arbitrator issued an award to Buyers on one of the claims submitted to arbitration on the merits and denied Buyers any recovery on two smaller claims. [Id. at p. 21]. More significantly for purposes of the Application, the Arbitrator ruled that any escrow balance after payment of Buyers&#39; award must remain in escrow until the federal lawsuit over Buyers&#39; breach of representations and warranties claims is resolved. [Id. at p. 19-20].
In so ruling, the Arbitrator found that the HEAs controlled the issue. The Arbitrator quoted the provision in §2 of the HEAs that “[t]he post-closing escrow funds shall be retained by the escrow agent . . . in the event that any claim, action or suit is pending by Buyers against Seller for breach of any survival period obligation (‘a post-closing claim&#39;) until the final, non-appealable resolution of such post-closing claim . . . .” [Id.] He went on to note the absence of any dispute that Buyers&#39; breach of representations and warranties lawsuit qualifies as a “post-closing claim” as defined in the HEAs. [Id.] Finally, he found that releasing the escrow balance prior to resolution of the lawsuit would leave Buyers “without security for Sellers performance of the representations and warranties at issue.” [Id.] That outcome would be at odds with the parties&#39; intent expressed in §2 of the HEAs, [Id.] which provides that the escrowed funds are “security for the performance of the Survival Period Obligations.” [Doc. No. 1-4 at p.2; Doc. No. 1-5 at p. 2].
Sellers filed a motion for modification of the Partial Final Award, in which they repeated their argument that the escrowed funds are not available to fund any recovery Buyers may realize in the federal court lawsuit, and that Sellers accordingly are destined to receive the balance of the escrowed funds regardless of the outcome of the federal court lawsuit. Sellers asked that a provision “[a]warding Sellers the remaining funds in escrow” be added in order “to complete the award.” [Doc. No. 5-4].
Again, the Arbitrator rejected Sellers&#39; argument. The Arbitrator explained that the Sellers&#39; requested change would not be a modification, as it “would actually reverse the decision on one of the issues addressed in the Award in Section E which fully resolves the issue of the disposition of the hold-back amounts/post-closing escrow funds.” [Doc. 1-10, p. 2].
The next step in the arbitration process was the prevailing party determination. Sellers argued they were the prevailing party in part because they are inevitably bound to receive the balance of the escrowed funds because those funds are not ...