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Cataldo Pirito v. Penn Engineering World Holdings

December 22, 2011

CATALDO PIRITO
v.
PENN ENGINEERING WORLD HOLDINGS, ET AL.



The opinion of the court was delivered by: Dalzell, J.

MEMORANDUM

Plaintiff and counterclaim defendant Cataldo Pirito ("Pirito") brings this action against defendants and counterclaim plaintiffs Penn Engineering World Holdings ("Penn World") and Penn Engineering & Manufacturing Corp. ("Penn Engineering," and collectively, the "Penn entities"), asserting two claims for breach of contract -- one against each defendant. These claims arise out of a Share Purchase Agreement (the "Agreement") executed in January of 2003 whereby Penn World purchased from Pirito the outstanding capital stock of Maelux SA, a Luxembourg corporation that owned all of the capital stock of M.A.E. S.p.A., an Italian corporation.

Pirito alleges that Penn World and Penn Engineering (which executed a Guarantee that Penn World would perform under the Agreement) failed to sell certain real property in Offanengo, Italy to Pirito upon his exercise of an option to purchase this property, as the Agreement required. The Penn entities counter with four claims of their own against Pirito: for (1) fraud; (2) breach and lapse of the option to purchase real property; (3) enforcement of the determination of an independent public accountant; and (4) breach of contract. The Penn entities allege that Pirito misrepresented the financial condition of Maelux SA and M.A.E. S.p.A. in violation of the Agreement.

Though Pirito filed this action in May of 2009, we stayed these proceedings for much of the ensuing time to permit the parties to try to resolve this complex dispute under the good offices of Judge Jacob P. Hart. When these discussions failed, we restored the case to our active docket and the parties promptly started a flurry of motion practice. We now have before us four fully briefed motions: (1) the Penn entities' motion for costs; (2) Penn World's petition to confirm arbitration award; (3) Pirito's motion to dismiss for lack of jurisdiction; and (4) the Penn entities' motion for partial summary judgment.

For the reasons set forth at length below, we will grant the Penn entities' motion for costs in part and Penn World's petition to confirm arbitration award in part. We will deny Pirito's motion to dismiss and the Penn entities' motion for summary judgment.

I. Factual and Procedural Background

For the reasons later detailed, we will resolve the pending motions without considering in depth the merits of the parties' claims. Instead, our decisions depend upon the language of the January, 2003 Agreement and the procedural history of the parties' efforts to arbitrate this dispute in Italy. We will thus recite the undisputed facts as to the Agreement itself and recount the arbitration proceedings initiated before the Chamber of National and International Arbitration of Milan (the "Chamber") on March 20, 2008.

Our decision will make more sense when it is placed in the context of the parties' allegations as to their performances under the Agreement and the outcome of an arbitration initiated before the Chamber in January of 2005 -- though the parties display little agreement on these topics. We will therefore rehearse the parties' main averments as to these topics, though we need not decide which averments to credit in resolving the pending motions.

A. The Undisputed Facts As To The Agreement

Pirito, an Italian citizen, resides in Brazil, Pl.'s Compl. ¶ 2; Defs.' Countercls. ¶ 1, while Penn Engineering is a Delaware corporation with its principal place of business in Danboro, Pennsylvania, Defs.' Countercls. ¶ 6; Pl.'s Ans. to Defs.' Countercls. ("Pl.'s Ans.") ¶ 6. Penn World is a Bermuda limited partnership, whose General Partner is Penn Engineering Holdings, Inc., Defs.' Countercls. ¶¶ 7, 9; Pl.'s Ans. ¶¶ 7, 9. Penn Engineering Holdings, Inc. is a wholly-owned, direct subsidiary of Penn Engineering. Defs.' Countercls. ¶ 8; Pl.'s Ans. ¶ 8.

On January 23, 2003, Pirito and Penn World entered into an Agreement whereby Penn World purchased from Pirito all of the capital stock of Maelux SA. Pl.'s Compl. ¶¶ 8-9; Defs.' Countercls. ¶¶ 16-17. The Agreement provided that "[t]he Buyer agrees to pay to the Seller, subject to adjustment as provided in Section 2(d), a purchase price (the 'Purchase Price') by delivery of (i) cash in the amount of €7,000,000 payable to the Seller by wire transfer or delivery of other immediately available funds, [and] (ii) cash in the amount of €2,000,000 payable to the Escrow Agent by wire transfer or delivery of other immediately available funds," as well as enough funds to satisfy in part a loan that Maelux SA had taken out and an earn-out to be paid to Pirito over four years. Ex. A.1 to Defs.' Countercls. ("Agreement") § 2(b).

The Agreement established an elaborate mechanism for determining the consolidated net worth of Maelux SA after the closing, id. § 2(d), and this mechanism proved sufficiently important during the proceedings in which the parties later participated that we will quote the relevant language of the Agreement at length:

Immediately after the consummation of the Closing hereunder the Buyer shall, at the Buyer's expense, engage Ernst & Young LLP to prepare an audited consolidated balance sheet of the Company (the "Closing Statement") and determine the consolidated net worth (i.e., total assets minus total liabilities) of Maelux (including the Company) as of the close of business on the business day immediately preceding the Closing Date ("Net Worth"), which shall be prepared in accordance with Italian Accounting Principles applied on a consistent basis for all periods subject to the accounting standards more fully described on Appendix G. Ernst & Young LLP shall be required to deliver the Closing Statement to the Buyer not later than 90 days after the Closing Date. Promptly after the Buyer's receipt thereof, the Buyer shall deliver a copy of the Closing Statement to the Seller. Upon receipt of the Closing Statement, the Seller shall give written notice to the Buyer within 30 days if the Seller disputes the Closing Statement and the parties shall negotiate in good faith to resolve such dispute. . . . If the Buyer and the Seller are unable to resolve such dispute within 15 days after the Buyer is notified thereof, the disputed matters shall be referred to an independent public accountant satisfactory to the Buyer and the Seller, who shall be directed to determine the Net Worth of the Company as of the close of business on the business day immediately preceding the Closing Date and the determination of such accountant shall be binding on the parties hereto. If the Buyer and the Seller are unable to agree upon an independent public accountant, the Buyer and the Seller shall each designate an independent public accountant, who shall choose the independent public accountant that will finally determine the Net Worth of the Company as of the close of business on the business day immediately preceding the Closing Date. The Buyer and the Seller shall each pay one-half of the cost of the services of such independent accountant. If and to the extent that the Net Worth of the Company reflected on the Closing Statement as finally determined ("Net Worth at Closing") shall be an amount less than €815,821 ("Minimum Required Net Worth"):

(i) the Purchase Price shall be retroactively and immediately reduced by an amount equal to the amount ("Net Worth Deficit") by which the Net Worth at Closing is less than the Minimum Required Net Worth, and (ii) an amount equal to the Net Worth Deficit shall become immediately due and payable to the Buyer from the Seller, such amount being payable first from the Escrow, and, if in excess of the Escrow, then by the Seller.

The Agreement envisioned the prospect that Pirito would purchase the "Real Property," meaning "land and buildings owned by the Company in Offanengo, Italy," id. at 4, from Penn World following the closing. Thus, the Agreement provided that "[u]pon delivery of a written notice" to the Seller or the Buyer "not less than 60 days prior to the third anniversary of the Closing Date," "the Seller shall be obligated to purchase the Real Property from the Company" and "the Buyer shall be obligated to cause the Company to sell the Real Property by the Seller" on the third anniversary of the closing date. Id. § 2(f)(i)-(ii). Under the Agreement, however, "[i]n the event there are outstanding amounts owed at the end of the three-year period by the Seller to the Buyer for any matter with respect to this Agreement . . . the Real Property Payment Amount will be increased by such amounts, provided, however, that no increase will be made for amounts for which a claim is pending under the Escrow Agreement." Id. § 2(f)(vii).

The Agreement contained Pirito's representations that, (among other things): (1) certain financial statements attached to the Agreement "present fairly the financial condition of the Company and Maelux," id. § 4(d); (2) M.A.E. S.p.A. "has no liability . . . except for (i) liabilities set forth on the face of the Most Recent Balance Sheet (rather than in any notes thereto) and (ii) liabilities that have arisen after the Most Recent Fiscal Month End in the Ordinary Course of Business," id. § 4(f); (3) "Maelux's sole assets are, and has [sic] been since its incorporation, the Company Shares. Except for owning the Company Shares, Maelux has never conducted any business activity," id. § 4(k); and (4) "[t]he inventory of the Company . . . is merchantable and saleable in the Ordinary Course of Business . . . and, except as set forth on Appendix H or Appendix I, none of which is Slow Moving Inventory or Obsolete Inventory." Id. § 4(l).

Finally, with respect to the resolution of disputes, § 13(h) states that "[t]his Agreement shall be governed by and construed in accordance with the laws of Italy without giving effect to any choice or conflict of law provisions or rules that would cause the application of the laws of any jurisdiction other than Italy." Section 13(m) further provided that Except for disputes concerning the preparation of the Closing Statement and any reduction of the Purchase Price under Section 2(d), which shall be resolved in accordance with such Section 2(d), any other dispute arising under the indemnification provisions or any other provisions of this Agreement or the Real Property Agreement, including those concerning their validity, interpretation, performance and termination, shall be referred to an arbitral tribunal in Milan, Italy, or such other place agreed by the Parties hereto . . . . Judgment may be entered in any court of competent jurisdiction based upon the decision reached in such arbitration.

On the same day that Pirito and Penn World entered into the Agreement, Penn Engineering executed a Guarantee, Pl.'s Compl. ¶ 11; Defs.' Ans. ¶ 11, under which Penn Engineering & Manufacturing Corp. ("Parent") irrevocably guarantees each and every representation, warranty, covenant, agreement and other obligation of the Buyer, and/or any of its permitted assigns (and where any such representation or warranty is made to the knowledge of the Buyer, such representation or warranty shall be deemed made to the knowledge of Parent), and the full and timely performance of their respective obligations under the provisions of the foregoing Agreement.

Ex. B to Pl.'s Compl. ("Guarantee") at 1.

B. The Parties' Allegations as to Performance

Both Pirito and the Penn entities contend that following the closing of the transaction described in the Agreement, the other party or parties violated it. The Penn entities also claim that Pirito's conduct leading up to the closing constituted fraud.

Pirito alleges that on February 22, 2007, he notified Penn World of his decision to exercise his option to purchase the Real Property under § 2(f)(ii) of the Agreement, Pl.'s Compl. ¶ 23, but that Penn World responded "that Plaintiff would only be able to take title to the Real Property if Plaintiff agreed to pay an additional €2,994,509 / $4,087,265 USD, which Defendant Penn World's counsel, Mr. Dreher, claimed Plaintiff owed Defendant, Penn World." Id. ¶ 27. According to Pirito, "[u]nder the terms of the Agreement governing the sale of the Real Property, no term requires the payment of these additional monies to Defendant Penn World." Id. ¶ 32.

The Penn entities, for their part, assert that "[o]n July 2, 2003 Penn World gave Pirito notice of the Closing Statement provided by Ernst & Young, consisting of the Audited Balance Sheet of M.A.E. as of February 5, 2003, finding that M.A.E.'s Net Worth was a negative €442,000 and the Net Worth Deficit was approximately €1,258,000." Defs.' Countercls. ¶ 96. The Penn entities further allege that "[a]fter years of delay by Pirito, in October 2007, an independent public accountant, Dr. Marcello Del Prete . . . . determined that the Net Worth was negative €669,856 as of February 5, 2003 -- not €815,821 as represented by Pirito." Id. ¶ 48. The Penn entities contend that Pirito misrepresented the Net Worth in the Agreement, id. ¶ 49, and further aver that Pirito misrepresented M.A.E. S.p.A.'s income and profit, id. ¶ 51, and the "warehouse value," which presumably refers to M.A.E. S.p.A.'s inventory, id. ¶ 52 -- all in violation of the Agreement. The Penn entities also claim that in the spring of 2005 Pirito filed a lawsuit against Maelux SA to collect a €514,000 debt he claims Maelux SA owed him that he had created and that he had not disclosed to the Penn entities. Id.

¶¶ 80-83. According to the Penn entities, the existence of this debt contradicted certain of Pirito's representations in the Agreement, including that "Maelux did no business other than own the M.A.E. stock." Id. ¶ 79.

C. The Parties' Allegations As To The First Arbitration

According to the Penn entities, Pirito's counsel contested Ernst & Young's Net Worth Deficit calculation in July of 2003, Defs.' Countercls. ¶ 99, and the Penn entities attempted to resolve this dispute with Pirito from late July of 2003 until January of 2004. Id. ¶ 104. When Pirito refused to identify an independent accountant pursuant to § 2(d) of the Agreement, however, id. ¶ 133-34, the Penn entities initiated an arbitration proceeding (the "First Arbitration") in the Chamber in January of 2005. Id. ¶ 135; Pl.'s Compl. ¶ 35.

The Penn entities claim that before the First Arbitration panel Pirito interposed a number of challenges to the panel's jurisdiction, the validity of the Agreement, and the manner in which Penn World had served him with Ernst & Young's closing statement. Id. ¶ 136. According to the Penn entities, in February of 2007 the Panel issued a Partial Determination "rejecting Pirito's claims that: the Arbitration Panel was not competent under the Agreement to make any decision with respect to the validity, interpretation or execution of the Net Worth provision in the Agreement; that the Net Worth provision was void and the service of the Closing Statement was untimely." Id. ¶ 137. The Panel, however, "found that it did not have the power to appoint an independent public accountant," id., leading Penn World to file a petition in the Court of Milan on February 22, 2007 to appoint such an accountant. Id. ¶ 138; Pl.'s Ans. ¶ 138.

The Penn entities aver that in mid-2007, the Court of Milan "appointed Dr. Marcello Del Prete as the independent public accountant to determine the Net Worth Deficit." Id. ¶ 140. The parties agree that "[i]n early October 2007, Dr. Del Prete issued his report finding that the Net Worth of the Consolidated Financial Statement of Maelux was a negative €669,856 and that the Net Worth Deficit was €1,485,687." Id. ¶ 142; Pl.'s Ans. ¶ 142. Pirito maintains, however, that "the independent public accountant's report was seriously flawed and did not accurately calculate the Net Worth value." Id. In October of 2007, Penn World sought to have the First Arbitration panel consider Del Prete's report. Defs.' Countercls. ¶ 148; Pl.'s Ans. ¶ 148.

If the Penn entities believe that they found some vindication before the First Arbitration panel, Pirito, too, alleges that he was vindicated. According to Pirito, on February 1, 2008, "[t]he Arbitration Panel rejected Defendant Penn World's position" that "it had a right to demand that Plaintiff pay an additional €3,000,000 / $4,094,760 USD to Defendant before conveying title to the Real Property as a 'guarantee' that other allegedly outstanding amounts owed by Plaintiff would be paid." Pl.'s Compl. ¶ 39. Pirito further contends that "[t]he first Arbitration Panel refused to consider Mr. Del Prete's findings because it concluded that the issue of price adjustment could not be adjudicated as an arbitration matter." Pl.'s Ans. ¶ 149. The Penn entities disagree, maintaining that the Panel "did not consider Dr. Del Prete's findings" merely due to "Pirito delaying the appointment of Dr. Del Prete and delaying and hindering the completion of his report." Defs.' Countercls. ¶ 149. Penn World thus filed a second request for arbitration (the "Second Arbitration") before the Chamber on March 20, 2008. Penn World's Pet. to Confirm Arb. Award ("Def.'s Pet.") ¶ 11; Pl.'s Resp. to Def.'s Pet. ¶ 12.

D. The Undisputed Facts As To The Second Arbitration

On February 13, 2009 -- shortly before the parties filed their pleadings in this action -- the Chamber filed a Partial Award on Jurisdiction in the Second Arbitration. Defs.' Pet. at 4 n.1; Pl.'s Resp. to Def.'s Pet. ¶ 13. In the Partial Award, a majority of the arbitral panel concluded that "[t]he Tribunal has jurisdiction on the claim of the Claimant for the Net Worth Deficit as formulated in the Request for Arbitration." Ex. C to Def.'s Pet. at 25. One arbitrator dissented, explaining that "the First Tribunal held that it lacked jurisdiction on all claims relating to price reduction pursuant to Article 2(d) SPA," id. at 8*fn1 (emphasis in original), and that "[t]he First Tribunal's decision on jurisdiction -- and more specifically on the interpretation of the Arbitration Clause in relation to the issue of price reduction -- is final, it is res judicata." Id. at 9. The dissenting arbitrator thus concluded that "the finding of the majority that our Tribunal has jurisdiction over the Claim is . . . in contrast with the decision on jurisdiction of the First Tribunal which is final and binding," and that "[o]ur Tribunal should therefore have declined jurisdiction over the Claim." Id. at 11.

On September 18, 2009 -- after Pirito had filed his complaint and the Penn entities had filed their counterclaims, but before Pirito answered these counterclaims -- the Second Arbitration panel issued a Final Award. Def.'s Pet. ¶ 14; Pl.'s Resp. to Def.'s Pet. ¶ 14. The panel noted that Penn World had submitted three prayers for relief, Ex. B to Def.'s Pet. ¶ 52 (quoting Penn World's Ex. C-5 at 13):

"1. Condemn the Respondent to pay the amount of € 1,485.677, deriving from the determination of Mr Del Prete, with interest from the 5th February 2003 to the moment of payment at the applicable Rate (Euribor at one month) . . . .

2. Condemn the RESPONDENT to pay the amount of € 40,935.66 for the 50% of the costs of Mr Del Prete (plus interest from the date of the invoice of Mr Del Prete) and € 150,000 -- for legal costs for the proceedings in volontaria girisdizione;

3. Condemn the RESPONDENT to pay all the costs of these proceeding [sic]."

The Second Arbitration Panel concluded that "[t]he conclusions of the Del Prete Report are valid, final and binding upon the Parties," id. ¶ 116, and thus decided as follows, id. at 32:

1. Mr Cataldo Pirito shall pay to Pennengineering World Holdings LP the amount of € 1.485,677 plus interest at the Euro Libor (one month) as reported in the Wall Street Journal as from ...


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