Opinion ID: 672322
Heading Depth: 2
Heading Rank: 2

Heading: the appeal by the former shareholders of isoetec

Text: 81 The former shareholders of Isoetec raise several issues for our consideration.
82 First, the former shareholders of Isoetec argue that the district court erred in denying them recovery of costs and prejudgment interest on the amount awarded to them by the arbitrator. According to the former shareholders, Texas law has long recognized that prevailing parties are entitled to recover prejudgment interest as a matter of law. In their view, they received a net judgment for some $1,925,000 despite Executone's contention that it owed nothing to the former shareholders. They seek interest at the Texas prejudgment interest rate of 10%, accruing from January 1, 1990, the date Executone was to have purchased Isoetec. In response, Executone relies on the arbitrator's conclusion that Executone was the prevailing party and claims that the district court enjoys broad discretion in deciding whether prejudgment interest is appropriate. 83 Texas law governs the award of prejudgment interest on the arbitrator's award. See Schlobohm v. Pepperidge Farm, Inc., 806 F.2d 578, 583-84 (5th Cir.1986) (applying Texas law in reviewing a district court's award of prejudgment interest on an arbitration award); see also Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct. 927, 941-42 n. 32, 74 L.Ed.2d 765 (1983) (noting that the Arbitration Act creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal-question jurisdiction); Northrop Corp. v. Triad Int'l Marketing S.A., 842 F.2d 1154, 1155 (9th Cir.1988) (applying state law to the determination of prejudgment interest in a diversity suit under the Federal Arbitration Act). Under Texas law, prevailing parties receive prejudgment interest as a matter of course. Richter, S.A. v. Bank of Am. Nat'l Trust and Sav. Ass'n, 939 F.2d 1176, 1197 (5th Cir.1991). An arbitration award bears interest in the same manner as a judgment of a court of last resort in Texas. Kermacy v. First Unitarian Church, 361 S.W.2d 734, 735-36 (Tex.Civ.App.--Austin 1962, writ ref'd n.r.e.). 84 We find nothing in the cases to suggest that prejudgment interest is appropriately awarded only to parties who prevail to the full extent of the relief they have sought. The award of prejudgment interest is based on the equitable grounds that an injured party should be made whole. Matthews v. DeSoto, 721 S.W.2d 286, 287 (Tex.1986). This policy is advanced by awarding prejudgment interest to a party who has received part of the relief he has sought no less than by making the award in cases in which the party prevails completely. Thus, the arbitrator's statement that Executone was the prevailing party should have no bearing on the prejudgment interest question. This is the approach we implicitly took in Schlobohm, in which we affirmed an award of prejudgment interest to a party who received an arbitration award of roughly half the amount he requested. Schlobohm, 806 F.2d at 579, 583-84. 85 Executone argues that it was within the district court's discretion to refuse to award prejudgment interest to the former Isoetec shareholders. The Texas Supreme Court has made clear that the award of prejudgment interest, although equitable in nature, is not generally a matter for the trial court's discretion. Matthews, 721 S.W.2d at 287; see also Concorde Limousines, Inc. v. Moloney Coachbuilders, Inc., 835 F.2d 541, 549 (5th Cir.1987) (We read Cavnar [v. Quality Control Parking, Inc., 696 S.W.2d 549 (Tex.1985),] and Matthews as creating a regime in which equitable prejudgment interest is awarded as a matter of course when the trier of fact finds that damages accrued before the time of judgment.). We have recognized, however, that the district courts can make an exception to this general rule if they cannot address through other means any equitable concerns that favor the defendant, even to the point of eliminating the award of interest entirely. Concorde Limousines, 835 F.2d at 549. If the district court denies prejudgment interest without explanation, our appropriate course is to remand the issue so that the court may either explain the exceptional circumstances warranting the denial of interest or award interest at the appropriate rate. Id. at 549-50; American Int'l Trading Corp. v. Petroleos Mexicanos, 835 F.2d 536, 540-41 (5th Cir.1987); see also Richter, 939 F.2d at 1197-98 (affirming the denial of prejudgment interest for the reasons given by the district court). 86 We conclude that remand is necessary in the instant case. It is tempting to conclude simply that the former shareholders of Isoetec are foreclosed from receiving prejudgment interest because it was denied them by the arbitrator. See Schlobohm, 806 F.2d at 584 (This is not a case in which the parties have submitted their entire dispute to arbitration, thus arguably preventing the district court from modifying the award by adding pre-award interest.). It does not appear to us, however, that the issue of prejudgment interest was presented to the arbitrator; indeed, the arbitrator was not even requested to perform the final calculation of the Isoetec purchase price, but rather only to rule on various claims with respect to Isoetec's 1989 profits. It was left to the district court to perform the final calculation. The court, we note, concluded that the final purchase price under the arbitrator's decision was $1,351,208, and that Executone was entitled to a credit of $48,579 for overpayment plus interest from April 1, 1990. Interest on the former Isoetec shareholders' $1,187,000 damages award was denied as not appropriate without further explanation. 87 Discerning no reason for the dissimilar treatment of the parties, we must VACATE the district court's denial of prejudgment interest to the former shareholders of Isoetec and REMAND for further proceedings on the matter. We intimate no views on the merits of whether the former Isoetec shareholders are entitled to prejudgment interest. 88 As for the district court's decision to tax all costs of court to the parties incurring the same, we have recognized that the lower courts have wide discretion in this determination and that reversal is warranted only upon a clear showing of abuse of discretion. Sidag Aktiengesellschaft v. Smoked Foods Prods. Co., 854 F.2d 799, 801-02 (5th Cir.1988). The former Isoetec shareholders have not made the requisite showing, so we AFFIRM the award of costs.
89 The former Isoetec shareholders next argue that the district court erred in failing to award them their attorneys' fees incurred since the date of the arbitration award in their attempt to enforce that award. For support they rely on our decision in International Ass'n of Machinists, Dist. 776 v. Texas Steel Co., 639 F.2d 279, 283 (5th Cir. Unit A Mar. 1981), in which we held that a district court's refusal to award attorneys' fees to a union for seeking judicial enforcement of an arbitration award should be reviewed for abuse of discretion. In Texas Steel we reversed the district court's denial of attorneys' fees, holding that the employer's grounds for challenging the arbitration award were without merit and that its refusal to abide by the arbitration award on the grounds raised was without justification. Id. at 284; see also Amalgamated Meat Cutters of N. Am., Local Union 540 v. Great W. Food Co., 712 F.2d 122, 125 (5th Cir.1983) (A party to an arbitral award is not entitled to the attorneys' fees it incurs in enforcing that award unless the noncomplying party's refusal to abide by the award was 'without justification.' ). See generally John B. Spitzer, Annotation, Labor Arbitration: Recoverability of Attorneys' Fees in Action to Compel Arbitration or to Enforce or Vacate Award, 80 A.L.R.Fed. 302 (1986). Under the circumstances presented in Texas Steel, we concluded that the denial of attorneys' fees was an abuse of discretion. 639 F.2d at 284. Because Executone's challenge of the arbitration award, unlike that of the employer in Texas Steel, goes to the question of the arbitrator's authority, and because Executone's position is not a frivolous one, we find no abuse of discretion by the district court in the instant case. 90 The former Isoetec shareholders argue in the alternative that they are entitled to recover their attorneys' fees under the terms of the purchase agreement itself. The agreement provided, in pertinent part, The prevailing party in any litigation, arbitration, or other proceedings arising out of this Purchase Agreement shall be reimbursed for all reasonable costs and expenses incurred in such proceedings, including reasonable attorneys' fees. Plainly all of the parties emerged from arbitration with less than they had hoped to receive. The arbitrator concluded that Executone was the prevailing party. We find no error in the district court's implicit agreement with the arbitrator that the former Isoetec shareholders were not prevailing parties entitled to attorneys' fees and so AFFIRM the denial of fees.
91 The district court's final judgment ordered the former Isoetec shareholders to exchange the 246,619 shares of Executone stock that they had previously received for 383,399 new shares of Executone stock under the terms of the purchase agreement. The former Isoetec shareholders now contend that the district court should not have awarded them the Executone stock but rather should have awarded them the cash value of that stock as it existed in 1990, $912,489. Further discussion of the terms of the purchase agreement is necessary to unravel this argument. 92 The purchase agreement allowed Executone to pay part of the purchase price for Isoetec with Executone stock. At the February 1990 closing, it appears that Executone opted to pay some $912,000 of the interim purchase price with Executone stock. At the time, the stock was worth $3.70 per share on the national stock exchange, so the Isoetec shareholders now defendants in this suit received 246,619 shares. The purchase agreement also provided that the number of shares would be adjusted at the time the final Isoetec purchase price was determined to reflect the value of Executone stock after the public announcement of Executone's 1989 year-end earnings and thereby to maintain the value of the consideration. According to the former Isoetec shareholders, this provision entitled them to receive another 136,780 shares in May of 1990, to reflect a drop in the price of Executone stock. The purchase agreement also required Executone to register the stock paid to the Isoetec shareholders with the SEC; Executone asserts that it did file the required registration form and concedes that the registration never became effective, but Executone alleges that this failure was due to the misconduct of the Isoetec shareholders in procuring the audit. The lack of registration has apparently prevented the former Isoetec shareholders from selling their Executone stock. 93 As we have noted, the arbitrator did not compute the final Isoetec purchase price or address the issue of how the final purchase price should be paid to the former Isoetec shareholders. The district court, therefore, could not simply enforce the arbitrator's award but rather was required to enforce the parties' contracts consistently with the arbitrator's award. After the arbitrator's award was released, the former Isoetec shareholders moved for summary judgment requesting judgment to be rendered in their favor in cash; Executone's cross-motion for summary judgment contended that the number of shares it had issued to the former Isoetec shareholders would have to be adjusted, but only so that identical percentages of the final purchase price and the interim purchase price would be represented by Executone stock and using the relevant 1990 stock prices as references. The relevant portion of the purchase agreement provides as follows: 94 The number of shares of Restricted Stock issued at Closing (the Estimated Restricted Stock) shall also be adjusted [upon calculation of the final Isoetec purchase price] as necessary to reflect the change in the average closing price used to calculate the number of shares of Restricted Stock issued at Closing from the average closing price over the 20 trading days immediately prior to Closing ... to the average closing price of Executone's publicly-traded common stock, par value $.01 per share, over the 20 trading days that occur after the public announcement of Executone's ... 1989 year-end earnings.... If the number of shares of Restricted Stock is to be adjusted upward, Executone shall promptly issue new certificates in the aggregate amount of such increase, in the names of the holders of the Estimated Restricted Stock. 95 From our review of the record is apparent that the district court accepted the position advanced by Executone's counsel at the oral argument regarding the parties' post-arbitration summary judgment motions. According to the presentation made by Executone's counsel, Executone's 1989 year-end earnings were announced in March 1990, followed by a drop in the value of Executone's stock to an average of $2.38 over the next twenty days. The district court used this $2.38 figure in ordering Executone to issue 383,399 shares of stock to the former Isoetec shareholders in exchange for the 246,619 shares previously issued (246,619 shares at $3.70 per share is equivalent in value to 383,399 shares at $2.38 per share). The final judgment thus seems to conform to the plain language of the purchase agreement. 96 According to the former Isoetec shareholders, however, this forced exchange of Executone stock is inadequate to put them in the same position as if the contract had been carried out because the Executone stock is now worth much less than it was in May of 1990. See Reynolds Metal Co. v. Westinghouse Elec. Corp., 758 F.2d 1073, 1079 (5th Cir.1985) ([T]he rules for contract damages are intended to place the victim of the breach in the same position he would have occupied had the breach not occurred.). The former shareholders also assert that all the parties contemplated that the former Isoetec shareholders would sell their Executone stock as soon as possible after Executone registered the stock in 1990. 97 Executone responds that the former shareholders are making an equitable argument that they are in no position to assert. In Executone's view, the Isoetec shareholders knew that the purchase agreement expressly provided that the Executone stock delivered at the interim closing could not be sold, and they also knew that they would not receive transferable Executone stock until the final purchase price had been calculated. Executone contends that the shareholders are to blame for the long delay in calculation of the final purchase price--because they overstated Isoetec's 1989 earnings and because they delayed the arbitration and forced Executone to file suit. Executone also contends that the former shareholders' complaints about Executone's delay in registering its stock with the SEC is an exercise in misdirection. In Executone's view, its initial failure to register the stock was Isoetec's fault because Isoetec delayed in providing Executone with the 1989 audit report; Executone asserts in its brief that it has now complied with the district court's order requiring Executone to deposit the stock with the district court and to file a registration statement. 98 The district court's order with respect to the Executone stock is, in our view, in harmony with the relevant provisions of the purchase agreement. Finding no error, we AFFIRM that portion of the final judgment.
99 The former Isoetec shareholders raise one other issue. Certain Isoetec employees held stock appreciation rights (SARs) in Isoetec that entitled them to receive cash for their SARs upon the sale of Isoetec. Executone entered into an agreement (apparently at the time of the February 1990 closing) with the SAR holders whereby the SAR holders agreed that they would accept some Executone stock in lieu of cash upon the sale of Isoetec to Executone. According to Executone, the SAR holders received Executone stock worth a total of $290,001, plus $190,834 in cash. The district court's final judgment stated as follows: 100 It is further ORDERED that upon entry of this Judgment the defendants, representing the former shareholders of Isoetec Texas, Inc., surrender to Executone the non-negotiable promissory notes and convertible promissory notes issued by Executone to the former shareholders of Isoetec on February 6, 1990, and any stock appreciation rights they received in Executone stock. 101 (emphasis added). 102 The former Isoetec shareholders claim that the district court erred in requiring the SAR holders to surrender the Executone stock they received in lieu of their SAR cash payments. In their view, the SAR stock has no relation to the purchase price stock and constitutes no part of this suit because Executone has requested no relief from the SAR agreement. The former shareholders also complain that this portion of the judgment below affects persons not parties to this suit, but as Executone points out, the part of the judgment complained of orders only the defendants, representing the former shareholders of Isoetec ... [to] surrender to Executone ... any stock appreciation rights they received in Executone stock (emphasis added). Thus, the order was directed only to the parties before the court. 103 Executone responds that its agreement with the SAR holders provided that the stock issued to them would be returned to Executone, revalued, and reissued once the final purchase price was determined. Executone also points out that the shareholders themselves filed a brief with the district court requesting the court to recalculate the amounts due the SAR holders as part of its final judgment. The former shareholders respond that the sole purpose of the recalculation was to ensure an accurate calculation of the purchase price because the SARs were included on Isoetec's income statement as an expense. 104 We review the record to determine when issues regarding the rights of the SAR holders were raised in the district court. It appears that the parties proposed final Isoetec purchase prices to the district court in their post-arbitration motions for summary judgment, each purportedly based on the arbitrator's decision. Executone contended that the final Isoetec purchase price should be $1,093,921. The former Isoetec shareholders filed a response to Executone's motion in which they argued that Executone's figure was incorrect; part of their argument was that Executone's calculation assumed that the value of the SAR holders' rights remained $480,844, as originally calculated, and that the SAR holders' rights should actually be devalued to $202,500 under the terms of the arbitrator's award. In a subsequent response to Executone, the former shareholders again contended that the value of the SAR holders' rights had to be reduced in order to calculate the final purchase price. Attached to that response is a copy of the agreement drawn up to deal with the rights of the SAR holders. According to this agreement, the SAR holders were divided into three classes, and Executone was to pay the members of each class cash or Executone stock in satisfaction of the SAR holders' rights. The amounts of cash and stock paid by Executone were to be adjusted in the same manner as the consideration received by the Shareholders pursuant to the Purchase Agreement, if at all. 105 After the district court entered its order granting the former Isoetec shareholders' summary judgment motion and denying that of Executone, the former shareholders filed a proposed final judgment that did not mention the SAR holders. Executone filed an objection, complaining that the proposed final judgment ignored the recalculation of the SAR holders' rights that the former shareholders had earlier called for and arguing that any person receiving benefits of this judgment should have to tender their stock appreciation rights. Otherwise, they will be afforded a double recovery. The former Isoetec shareholders responded that Executone was claiming [f]or the first time in this case a right to offset for the impact of the arbitrator's decision on the SARs. The former shareholders acknowledged that the arbitration award reduced Isoetec's liability for SARs and thus increased Isoetec's income, but they contended that Executone's claim for any overpayment to the SAR holders had never been an issue in the case. They concluded that Executone has agreements with the SAR holders (of whom only Ed White is a party here), which agreements cover any reduction in the amount of the SARs and how such reduction would be handled, and those matters are best left to those agreements. The district court then entered the final judgment, including the passage quoted supra about which the former shareholders now complain. 106 Executone explains the district court's decision as follows. At the closing, the SAR holders received $290,001 worth of Executone stock and $190,834 in cash. In their calculation of the final purchase price, the former Isoetec shareholders themselves represented to the court that the SARs were worth only $202,500. Thus, argues Executone, the court acted properly in ordering the SAR holders (or at least the one before the court, defendant White) to return the stock that they had received for their SARs. The problem with this logic, of course, is that the district court's order leaves the SAR holders as a group with even less than the $202,500 that the former Isoetec shareholders argued that the SAR holders were entitled to receive. 107 We find ourselves unable to pass on the merits of the former shareholders' argument and must remand for further proceedings. Executone's own argument in support of the district court's order implies that the SAR holders are entitled to receive new Executone stock to reflect the final purchase price, in accordance with the provisions of the purchase agreement. The district court gave no explanation for divesting the SAR holders of the Executone stock that they had received for their SARs. We must therefore VACATE the portion of the district court's final judgment ordering the defendants to surrender to Executone any stock appreciation rights they had received in Executone stock and REMAND this issue for clarification. Once again, we intimate no views whatsoever on the proper outcome.