Court Opinion

ID: 9650695
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:49:13.065344+00
Date Added: 2024-06-11T18:12:25.311750
License: Public Domain

CLARK, Circuit Judge
(dissenting).
The parties here stipulated for and admittedly obtained the honest and carefully foimulated judgment of an experienced arbitrator. I think it just as improper to trip him up on a hostile examination of his mental processes, and set aside his award on the basis of an incomplete answer removed from context, as it would be to reverse a trial judge after a similar grueling. It seems to me to neutralize and negate the strong judicial admonitions that a party who has accepted this form of adjudication must be content with the results. American Almond Products Co. v. Consolidated Pecan Sales Co., 2 Cir., 144 F.2d 448, 154 A.L.R. 1205, with annotation 1210-1215; Mutual Benefit Health & Accident Ass’n v. United Casualty Co., 1 Cir., 142 F.2d 390, certiorari denied 323 U.S. 729, 65 S.Ct. 65, 89 L.Ed. 585. Indeed, as applied to this case the words of Judge Learned Hand in the case first cited *964take on a fine irony. He said that the parties who have adopted arbitration “must content themselves with looser approximations to the enforcement of their rights than those that the law accords them, when they resort to its machinery.” 144 F.2d at page 451. Judicial valuation is a notoriously loose approximation at best. Cf. United States v. Brooklyn Union Gas Co., 2 Cir., 168 F.2d 391. But now it seems (though our final standard is in fact left distressingly vague) that we are about to force upon an ad hoc valuation by agreement a much tighter mechanical procedure than we would think of requiring of. a court.
As a matter of fact, the plaintiff has had to shop around until he could find a forum to listen to his plea. This is the third attempt he has made. Two previous proceedings in the state court — one going as far as the Appellate Division of the New York Supreme Court — were summarily dismissed without allowing the cross-examination of the arbitrator which he has obtained in the federal court. I have been a sincere advocate of federal discovery, but its reaches here have surely been far. That, in itself, however, I would not criticize. It is the setting aside of the arbitrator’s award upon what really seems to me a quite trivial basis that I find disturbing in its implications. Here the plaintiff resorted to arbitration because he found himself in a bad way with his then extensive litigation. By his agreement to arbitrate he secured the disposal of the pending lawsuits; and now after their threat has been done away with by his submission, he is able coolly to push aside the award which disappoints him and have another try for a prize which up till now has steadily eluded him. Such manipulation of arbitration seems to me destructive of its purposes and sure to bring it into disrepute as a proposed method of settlement of business disputes.
Our result is placed upon the ground that the arbitrator did not follow the formula of valuation of the stock agreed upon in the arbitration contract. The provision of the contract is quoted in full in the statement of facts, but is only sketchily discussed in the opinion itself. When it is examined with care, it is seen to be not a complete manual of valuation, but a caution designed rather to guard against inflated values than to push prices up. Thus the arbitrator '(a) is not bound by book value, but (b) is to determine the fair and reasonable value of the stock interests in the business of the Woodstock Corporation as a going concern (the latter surely, not its stock, is the “going concern”) in the light of past, present, and prospective future earnings and net worth of the business. This is a natural and so far forth admirable attempt to emphasize the present value of the business, as opposed to the initial investment. Then comes the important final provision, a direct warning against inflated valuation, in its requirement that, (c) in considering the value of Woodstock’s buildings, itiachinery, and equipment and its prospective future earnings, “consideration shall be given to what extent, if any, the present values and earnings are due to war conditions.” The agreement was signed on May 21, 1943. This was a textile business, as to which all of us still have vivid recollections of the wartime shortage and the operation of the companies to the top limit of which government regulation would permit. Of course the valuation of the business was not the ultimate conclusion; that was at most a step in finding the value of the stock. But the stock was not to be puffed up upon the basis of either future hopes or wartime profits.
In the light of this background I would not know, for my part, how any trier o-f the facts — judicial or lay — could proceed, except to consider the business background of the company, apart from war inflation, and then to try to decide as a matter of “business judgment” what a willing buyer was likely to pay for the stock. This is the normal rule, certainly not excluded from, if not reasonably incorporated into, the contract, provision. See our recent discussion and conclusion in a case of similar type in eminent-domain proceedings. United States v. Brooklyn Union Gas Co., supra. Since, so far as I can see, this is just what the arbitrator tried to do, I have great difficulty in discovering just what my brethren find wrong in his procedure, or *965what they now expect the district court— whom they are substituting for the agreed arbitrator — to do instead. The arbitrator was a textile engineer with unusual experience in the field — obviously much more than a district judge can have or indeed develop. Actually the parties were willing to accept his firm, J. E. Sirrine & Co., of Greenville, South Carolina, as the sole arbitrator; instead they received his own individual service. It is ironical that when he first sensed a possible dispute as to his award he tried to withdraw, but was induced to continue upon the insistence of plaintiff, at least equally with the defendant. There is not the slightest doubt that he had before him all the possible {factors for a valuation in the most approved amalgam suggested by any court, including all the material concerning the operating profits or net earnings of Woodstock for the five years in question. This we can see for ourselves, since we have before us the very voluminous reports, memoranda, and figures which the parties had previously submitted to him. Of course he valued the corporation as a going concern, i. e., as a business unit in operation. This he says over and over in his answers to the interrogatories. In fact, he had gone to the company plant and thus had seen it. As he says and reiterates, he tried to establish for himself by the exercise of a judgment informed by experience upon the various factors before him a value in exchange based on these factors and discounting the inflated values as the formula bade him do. Merely because in the light of hindsight we as an appellate court may think the arbitrator’s value not sufficiently generous does not justify us in according the plaintiff another chance at further litigation which to date he has been so steadily losing.
I say this even upon the assumptions made by my brethren as to the arbitrator’s course of decision, for under the authorities first cited or referred to above, it seems to me clear that he did substantially carry out the formula and that in any event the' plaintiff cannot complain even if it be assumed that he reached only a “loose” approximation of it. Hence Judge Knox properly awarded summary judgment to the defendant.1 But I do not think they have been fair to the arbitrator. The case is made to turn upon only certain of his answers when very ill, just before his death, he was compelled to submit to this inquisition as to how he had made up his mind more than three years earlier. In trying to make an honest answer as to his men;-1 processes and after continually emphasizing his attempt to reach a value in exchange for the business as a going concern, he did say at one point that he just took into account the final balance sheet to ascertain present quick assets and *966did not capitalize prospective earnings because he did not consider that it had much prospective earnings. Of course in any event he should not have capitalized prospective earnings. That is widely considered an oversimplification and an erroneous form of valuation, as we pointed out in United States v. Brooklyn Union Gas Co., supra. But the idea he was struggling to express was no more than that ¡he did not think the company’s position in the past (the business in fact had had a poor financial record) held out promise for the future, and he was placing his valuation substantially on the present conditions, as shown by its present balance sheet. And that, I submit, was a perfectly sound and valid approach.
In truth, the idea here stated is one he had expressed more succinctly in a letter, in answer to plaintiff’s complaints, of March 6, 1944, which, written when he was well and the matter fresh in his mind, is a fairer statement of his mental processes than this hostile examination. He then wrote: “I took into account what I considered a fair value of the property as of today based on its earning records and earning possibilities, and what other factors it seemed to me would properly bear on the subject. Frankly, I do not think the property has very much earning capacity and that opinion seems to be justified by its records.” In response to previous questions he had guarded himself by stressing the going value of the business, by refusing to put his result on various limited statements, and by pointing out as to particular factors that he “had to lump it in as a going concern,”'that he “did take into account what I thought the mill’s prospects were on any normal market,” and so on. Indeed, were I to be subject to a hostile cross-examination on any judicial act of mine, and particularly on any attempt to expound the mysteries of judicial valuation, I could only wish that I might do as well. Had he realized that he was really on trial or had he been protected by astute counsel, he would have protected himself in every answer, not in just the earlier ones, and he would have continually claimed merely the exercise of a “business judgment” upon a conglomerate of facts which would have included any particular facts about which he was being questioned. As it now stands, we are disavowing a very fair and frank judge who is not here now to defend his judicial conduct.
The difficulties of an appellate review of a valuation hodgepodge are shown by the posture of the case as it now goes back to the newly substituted trier of the facts. I frankly do not see what the district court is now to do in the way of valuation, unless perhaps it reads between the lines and decides we wish an increased award in some form, always discreetly concealed as a conclusion from the exercise of business judgment upon just the same facts and figures as were in fact before the arbitrator. For there is nothing in the opinion which suggests anything new or different from the old formula, of making sure that all sorts of facts and figures are thrown into the hopper of the judicial mind, to come out bearing the label of fair value. Since we have not yet gone to the point of direct cross-examination of the district judge, I suppose that must be regarded as adequate in the stead of what was found to be inadequate when done by an experienced textile engineer. At least the district judge will have before him the object lesson of the disastrous results to his award of a modicum of frankness on •the part of an arbitrator.

 Since our differences are of law, there is little need to discuss the summary judgment. But I regret the tendency once again to substitute an inapposite dictum or aphorism for the rule itself, Federal Rules of Civil Procedure, rule 56, 28 U.S.C.A. following section 723c. Opportunity to observe the demeanor of a witness testifying to a fact is one of the several factors which were considered in the formulation of the rule; it is not the rule. The substitution of a court’s gloss on the rule in place of the rule itself has already led to confusion in the district courts, who not unnaturally accept a seemingly arbitrary mandate in place of the strain of deliberative judgment and who overlook not merely the universal criticism of commentators, but our own declination to be inflexible in practice. Dixon v. American Tel. & Tel. Co., 2 Cir., 159 F.2d 863, certiorari denied 332 U.S. 764, 68 S.Ct. 69; Ricker v. General Electric Co., 2 Cir., 162 F.2d 141; Bernstein v. Van Heyghen Frères Société Anonyme, 2 Cir., 163 F.2d 246, certiorari denied 332 U.S. 772, 68 S.Ct. 88; Egyes v. Magyar Nemzeti Bank, 2 Cir., 165 F.2d 539; Griffin v. Griffin, 327 U.S. 220, 235, 236, 66 S.Ct. 556, 90 L.Ed. 635; Peckham v. Ronrico Corp., D.C.P.R., 7 F.R.D. 324; 61 Harv.L.Rev. 375; 45 Col.L.Rev. 964; 13 Brooklyn L.Rev. 5; 33 A.B.A.J. 1111, 1112; 34 id. 187; Ilsen, Federal Rules of Civil Procedure, Rev.Ed. 1947, 346. Far from repudiating the rule, the case of Kennedy v. Silas Mason Co., 6S S.Ct. 1031, cites and uses it in the exercise of judicial judgment, in denying summary judgment — as I of course do, too, when my judgment (not some arbitrary command) so dictates. Compare my dissent in Bernstein v. Van Heyghen Frères Société Anonyme, supra. Denial of summary judgment may be equally harsh and unfair with its improvident grant — as the actual cases show.