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

Heading: litigation and arbitration

Text: 11 Executone's suit against the Isoetec defendants contained six counts, including breach of contract, common law fraud, and violations of the securities laws of Texas and the United States. Requested relief included specific performance, damages, or rescission. Federal jurisdiction was predicated on both diversity of citizenship and federal question and pendent jurisdiction by virtue of the count based on federal securities law. The Isoetec defendants answered and counterclaimed, also alleging fraud and securities law violations. 12 In November 1990, Executone moved for partial summary judgment, asking the court to find that the dispute is subject to final resolution by Price Waterhouse. The Isoetec defendants opposed this motion. The district court first sent the parties to non-binding mediation, then entered the following order: It is hereby ORDERED that the parties in the above action submit all issues to Price Waterhouse for final resolution within thirty (30) days pursuant to the terms of their agreement. 13 We must examine the correspondence between the parties and Price Waterhouse (referred to hereinafter as the arbitrator) in some detail. Executone submitted a number of issues challenging Isoetec's computations of its 1989 adjusted pre-tax profits on the basis of the accounting principles used by Isoetec. The arbitrator's resolution of these accounting issues, as they have been styled by the parties, has not been directly challenged in this litigation, and indeed it appears that the document whereby Executone described and submitted these issues to the arbitrator has not even been included in the record. It is clear from the record, however, that one of the accounting issues concerned the so-called Stewart Title transaction. It appears that Isoetec entered into a contract in March 1989 with Stewart Title Company (Stewart Title) to provide Stewart Title with telephone equipment, and that Isoetec's 1989 financial statements included $295,000 in profits from this sale. According to the arbitrator's report, Stewart Title had the equipment removed some time after 1989, apparently because it was dissatisfied with the equipment. Executone thus contended that Isoetec should not be allowed to count the $295,000 profit from the Stewart Title transaction because subsequent to year end, Stewart Title exercised its contractual right to return the equipment. 14 The Isoetec shareholders submitted their own list of issues to the arbitrator (the other issues). These issues generally charged Executone with taking actions that decreased Isoetec's 1989 profits by varying amounts. For instance, the shareholders charged that Executone had breached the distributor agreement by overcharging Isoetec for Executone equipment, thereby reducing Isoetec's profits and causing Isoetec to lose several contracts in 1989. The Isoetec shareholders also claimed that Isoetec and Executone had agreed that Executone would bid on a telephone installation needed by the Dallas Independent School District, that Executone and Isoetec had agreed to share the profits, and that Executone had failed to bid on the contract as promised. 15 Two of the Isoetec shareholders' other issues concerned the Stewart Title transaction. We reprint those two issues as submitted in full: 16 3. Loss of Stewart Title Dallas and Fort Worth systems due to equipment shortage and deficiencies. As a result of the defective software provided to Stewart Title--Houston, Stewart Title--Dallas and Stewart Title--Fort Worth canceled the existing contracts with Isoetec Texas, Inc. for installations in their Dallas and Fort Worth offices. These installations totalled $135,000.00, and the net profits after commissions would have been $38,000.00. Thus, 1989 profits should be increased by $38,000.00.... 17 .... 18 5. Additional costs on Stewart Title--Houston installation due to problems with Executone equipment. As a result of problems experienced with equipment provided by Executone and as a result of problems with the software provided by Executone on the Stewart Title--Houston installation, Isoetec Texas, Inc. was forced to assign several additional people to the job. Isoetec Texas, Inc. also had additional system redesign costs and other additional labor and material costs on that job as a result of Executone's equipment problems, resulting in a total additional cost to Isoetec Texas, Inc. in 1989 (and thus a reduction of 1989 profits) in the amount of $110,000.00.... 19 After receiving the parties' submissions and based on those submissions, the arbitrator contacted the parties by letter dated August 14, 1991, summarizing the arbitrator's understanding of Isoetec's other issues. The letter stated: 20 I believe the hearing will be most efficient if the other issues are handled separately from the accounting issues. Our understanding is that the other issues include the following: 21
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28 The letter also advised the parties to bring supporting documentation relevant to each of the other issues. With respect to the third issue, regarding loss of contracts, the arbitrator advised the parties to make available [c]orrespondence regarding deficiencies and shortages and [e]xpert citations regarding equipment functionality or lack thereof. Counsel for the Isoetec shareholders sent the arbitrator a letter agreeing that the arbitrator's letter listed all of the remaining issues other than the accounting issues; we have found nothing in the record to indicate that Executone ever acknowledged or objected to the arbitrator's August 14, 1991, letter. 29 The arbitrator released separate reports regarding the accounting issues and other issues in October 1991. In its report regarding the accounting issues, the arbitrator ruled that the $295,000 claimed by Isoetec as profits from the Stewart Title transaction could not be included as adjusted pre-tax profits for purposes of the purchase price computation. The arbitrator also ruled that certain other deductions should be made. The deductions in 1989 adjusted pre-tax profits required by the arbitrator totalled over $400,000. Under the terms of the arbitrator's report regarding the accounting issues, the final purchase price of Isoetec should have been roughly $1,100,000--substantially less than the interim purchase price of some $3,000,000. 30 What the arbitrator gave Executone with one hand, however, it took away with the other. In its report regarding the other issues, the arbitrator awarded $1,187,000 in damages to the former Isoetec shareholders, explaining that Executone had breached warranties with respect to the equipment involved in the Stewart Title transaction. Thus, the arbitrator awarded the former Isoetec shareholders damages equivalent to the impact on the purchase price of not having [the Stewart Title transaction] completed under its terms. Because the arbitrator deemed Executone the prevailing party, it deducted $125,000 in costs and fees from this damages award, for a total damages award of $1,062,000. 31 Returning to court, both Executone and the Isoetec defendants moved for summary judgment. Executone requested the court, among other things, to ignore the arbitrator's award of damages to the former Isoetec shareholders and to declare the final purchase price to be $1,093,921. The Isoetec defendants requested judgment in their favor in the amount of $2,573,567.27. This amount, of course, included the $1,062,000 damages award in favor of the former Isoetec shareholders and interest on that award. 32 The district court heard oral argument on the summary judgment motions on March 13, 1992. The court then directed the parties to file supplemental letter briefs addressing the scope of an arbitrator's authority and circumstances under which an arbitrator's decision can be set aside. On April 14, 1992, the district court entered an order denying Executone's motion for summary judgment and granting the Isoetec defendants' motion for summary judgment. In its final judgment, entered on June 23, 1992, the district court ordered that the arbitrator's award be adopted in all respects. The judgment further contained the following orders: (1) it awarded to the Isoetec defendants $1,187,000 with no prejudgment interest on such amount; (2) it directed that Executone should give the former Isoetec shareholders 383,399 new shares of Executone stock in exchange for the 246,619 shares previously issued; (3) it directed Executone to file a registration statement with the Securities and Exchange Commission (SEC) registering all shares of stock issued to the defendants; (4) it awarded Executone the $125,000 in fees awarded by the arbitrator and $48,579 (plus interest) as the amount that Executone had overpaid for Isoetec; and (5) it required former Isoetec shareholders who had owned stock appreciation rights in Isoetec and who had received Executone stock in exchange for those rights to surrender their Executone stock thereby received. 33 This appeal and cross-appeal followed.