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Day & Zimmerman, Inc., Et. Al v. Soc-Smg

October 22, 2012

DAY & ZIMMERMAN, INC., ET. AL., PLAINTIFFS,
v.
SOC-SMG, INC., DEFENDANTS.



MEMORANDUM

Plaintiffs, Day & Zimmermann, Inc. & The Day & Zimmerman Group, Inc. in the instant action filed a complaint to vacate an arbitration award. Defendant Security Operations Consulting-Security Management Group ("SOC-SMG") in whose favor the arbitration award was entered, now moves for the dismissal of the action and summary confirmation of the award. In light of the following, the Court will deny Defendant's motion to dismiss the complaint. Nevertheless, because Plaintiffs have failed to show that they are entitled to relief, the Court will grant Defendant's motion to confirm the arbitration award as it pertains to both the Interim Award and Final Award.

FACTUAL BACKGROUND

Plaintiff, Day & Zimmerman, Inc., (hereinafter "DZI"), is a Maryland corporation with its principal place of business in Philadelphia, Pennsylvania. Plaintiff, The Day & Zimmerman Group, Inc., (hereinafter "DZG"), is a Delaware corporation with its principal place of business in Philadelphia, Pennsylvania. DZI provides, among others, national defense and security services. DZI is a wholly owned subsidiary of DZG and conducts DZG's national defense businesses. Defendant, Security Operations Consulting-Security Management Group (hereinafter "SMG"), is a Nevada corporation with its principal place of business in Minden, Nevada. SMG provides international armed security services. (Compl. ¶¶ 4-8.)

On November 8, 2007, DZI and SMG entered into an agreement (the "Contribution Agreement") for the purpose of forming a new company, called Secure Our Country, LLC ("SOC").*fn1 Under the Contribution Agreement, SMG and DZI agreed that DZI would be the majority owner of SOC and hold a 60% interest. Because the assets contributed by SMG were more valuable than those contributed by DZI, DZI agreed to purchase 22% of SMG's interest for $42 million, of which $30 million was paid in cash at closing and $12 million was in the form of a Promissory Note ("Note"). In addition to the $42 million, DZI also provided a guarantee that SMG would receive $24 million in distributions from SOC over its first three years of operation commencing on January 2, 2008. (Compl. ¶¶ 9-10.)

Not long after closing, DZI claimed that it discovered what appeared to be irregularities in SMG's 2006 and 2007 financial statements. As a result, on July 10, 2008, DZI delivered a formal Notice of Claims to SMG alleging that SMG breached representations and warranties pursuant to Section 9.3(a) of the Contribution Agreement because SMG's 2006 and 2007 financial statements materially overstated SMG's earnings and were not in compliance with Generally Accepted Accounting Principles ("GAAP"). (Pls.' Brief in Opposition to Def.'s Mot. to Dismiss, 4).

On December 31, 2008, DZI notified SMG that it intended to withhold payments under the Note as an offset against SMG's liability to DZI. Thereafter, on January 30, 2009, DZI sent SMG a restated formal Notice of Claims alleging that SMG had twice breached the Contribution Agreement by breaching its financial representations and warranties and by failing to notify DZI in writing of the U.S. Army's switch from sole source contracting in Iraq to competitive bidding*fn2 which DZI claimed constituted a Material Adverse Effect ("MAE")*fn3 on SMG's business. (Compl. ¶¶ 11-14, 19.)

Arbitration Hearing and Interim Award

After several unsuccessful attempts to resolve the cited disagreements, on April 15, 2009, SMG filed a Notice of Claims (the "Arbitration") against DZI with JAMS.*fn4 On May 22, 2009, DZI filed an Answer to SMG's Notice of Claims and a Notice of Counterclaims. On August 13, 2009, SMG filed a First Amended Notice of Claim, alleging, inter alia, that DZI had mismanaged SOC and breached the Contribution Agreement by failing to pay the Note and by instructing SOC not to make distributions to SMG pending the outcome of the Arbitration.*fn5 On

September 4, 2009, DZI filed an Answer to SMG's First Amended Notice of Claim and Notice of Counterclaims denying any liability to SMG and seeking rescission of the Contribution Agreement, or in the alternative money damages.*fn6 (Compl. ¶¶ 17-18.)

An Arbitration hearing was conducted over nineteen days in January and February 2011before a panel of three arbitrators. On June 28, 2011, the panel issued an "Interim Award" dismissing the counterclaims of DZI and DZG. Specifically, the Panel concluded that SMG had not concealed anything from DZI and that DZI's actual knowledge of the relevant facts precluded SMG from being liable for fraud under Delaware law. Similarly, the Panel found that SMG's financial statements were GAAP-compliant, rejecting DZI's claims that SMG's 2006 and 2007 financial statements were not GAAP-compliant because it had not properly matched demobilization revenues with related demobilization costs and had failed to properly account for vacation and bonus costs. The Panel also rejected DZI's claim that SMG breached the Contribution Agreement by failing to notify DZI in writing of the U.S. Army's switch from sole source contracting in Iraq to competitive bidding. The Panel reasoned that no writing was necessary because DZI had actual knowledge of the switch and proceeded with the deal. The Panel further held that even if SMG's alleged inaction constituted a breach, it was excused by Section 9.6 of the Contribution Agreement which absolved SMG from liability for any conduct "reasonably attributable to the general state of the industy". At the conclusion of the hearing, the Panel awarded SMG $35,342,327 in damages, plus its reasonable attorney fees and costs incurred to collect on the $12 million promissory note. Thereafter, the Panel directed SMG to submit a fee petition within thirty (30) days of the Award. (Compl. ¶¶ 19- 21; Def.'s Mot. To Confirm Final Arbitration Award, 5.)

SMG's Fee Petition

On July 12, 2011, SMG submitted a Petition for Legal Fees and Costs, totaling $5,889,158.53. SMG argued that it was entitled to not only those fees and costs necessary for collection of the Note, but for all of its fees and costs incurred in the Arbitration because they were inextricably intertwined with its enforcement of the Note. SMG further reasoned that because DZI, in its defense, maintained that it was entitled to a setoff of the amounts it owed under the Note for damages it claimed to have suffered, SMG was required to defend against all of DZI's counterclaims simply to enforce its own rights under the Note. On August 1, 2011 and August 5, 2011, DZI responded to SMG's Petition arguing that the Panel could not reconsider its decision to limit SMG's recovery only to those fees and costs "solely and strictly necessary" for the collection of the $12 million Note. DZI further contended that SMG's total fees and costs were inextricably intertwined with its defense of DZI's claims, not the collection of the Note.

(Compl. ΒΆ 22; Final Arbitration Award, ...


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