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Pirito v. Penn Engineering World Holdings

United States District Court, Third Circuit

May 16, 2013

CATALDO PIRITO
v.
PENN ENGINEERING WORLD HOLDINGS, et al.

MEMORANDUM

STEWART DALZELL, J.

Before us in this protracted international commercial dispute are cross-motions for summary judgment by plaintiff and counterclaim defendant Cataldo Pirito (“Pirito”) and defendants and counterclaim plaintiffs Penn Engineering & Manufacturing Corp. (“Penn Engineering”) and Penn Engineering World Holdings (“Penn World”). After initial consideration of the submissions we ordered supplemental briefing on the effect of the judgment of the Milan (Italy) Court of Appeals that rejected Pirito’s appeals and confirmed the Italian arbitral awards of February 13 and September 18, 2009. We also consider both Penn entities' motion for costs.

As we described in our December 22, 2011 Memorandum (the "Memorandum"), this case arises out of a Stock Purchase Agreement (“SPA” or “the Agreement”) executed in February 2003[1]pursuant to which Penn World purchased the capital stock of Maelux SA, a Luxembourg corporation that owned all the capital stock of M.A.E. S.p.A. (“M.A.E.”), an Italian manufacturer and merchant of electric motors. Pirito v. Penn Engineering World Holdings, 833 F.Supp.2d 455, 460 (E.D. Pa. 2011); Def. Counterclaim ¶ 3. In his complaint, Pirito alleges that Penn World -- and through its Guarantee Penn Engineering[2] -- breached § 2(f) of the SPA by making a demand for the Real Property Payment Amount that was not based on the contract’s formula and then failed to sell him the property. Comp. ¶¶ 52-64.

The Penn entities counterclaimed in four counts: (I) Fraud, (II) Breach and Lapse of Option to Purchase Real Property, (III) Enforcement of the Determination of the Independent Public Accountant, and (IV) Breach of Contract. Def. Ans. ¶¶ 168 - 95. In our Memorandum, we granted Penn World’s motion to confirm the September 18, 2009 Final Award, Pirito, 833 F.Supp.2d at 470, and because this granted Penn World the relief it sought in Count III of its counterclaims, our determination mooted that count. Here, Penn World moves for summary judgment on Count II of its counterclaims, Breach (§ 2(d) of the SPA) and Lapse of Option (§ 2(f) of the SPA).

For the reasons we here explain at length, we hold that Penn World did not breach § 2(f) of the SPA, and we will thus grant the Penn entities’ motion for summary judgment on Pirito’s claims and deny Pirito’s motion for summary judgment on cognate claims. We hold that Pirito breached § 2(d) of the SPA and that the option has lapsed, and so we will grant the Penn entities’ motion for summary judgment with regard to Count II of the Counterclaims and in doing so we deny Pirito’s motion for summary judgment on his corollary contentions. We decline to enter the money judgment Penn World seeks on Count II of its counterclaims. We will dismiss Counts I and IV without prejudice as Penn World requests, and so will deny Pirito’s motion for summary judgment with regard to these claims as moot.

I. Factual and Procedural Background

In our Memorandum, we described the formation of the Agreement and recounted the (1) provision for determining the consolidated net worth of Maelux SA after the closing (contained in § 2(d)), (2) Real Property Agreement (contained in § 2(f)), (3) choice of law clause selecting Italian law (contained in § 13(m)), and (4) arbitration provision (also in § 13(m)). See Pirito, 833 F.Supp.2d at 460-62. We also rehearsed at length the factual history regarding Penn World’s allegations as to Pirito’s misrepresentations and failure to comply with § 2(d), § 3, and § 4 of the Agreement, the first and second arbitration proceedings and awards, and Pirito’s appeal. Id. at 463-66. We incorporate that information by reference, and we will now describe the facts relevant to the instant motions.

A. The Net Worth Deficit Dispute

Our Memorandum also considered the SPA’s mechanism for determining the consolidated net worth of Maelux SA at closing, whereby the parties would engage Ernst & Young LLP to determine the consolidated net worth of Maelux, including M.A.E.[3], on the day of closing, and if Pirito disputed that finding he would notify Penn World of the dispute and the parties would negotiate in good faith for fifteen days. If they were unable to resolve the dispute, the parties would refer the matter to a mutually-agreeable independent public accountant, and, if they could not agree on such an accountant, they would each designate an accountant, and the accountants would together choose an independent public accountant to determine the Net Worth. Pirito, 833 F.Supp.2d at 461. Next,

[i]f 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. SPA, Def. MSJ Ex. 1, at § 2(d).

Section 2(e) contains the escrow agreement, and it provides that “[a]t Closing, the Seller, the Buyer and Union Bank of Switzerland (the ‘Escrow Agent’) shall enter into a mutually satisfactory Escrow Agreement . . . in order to secure the Buyer with respect to (i) any repayment of the Net Worth Deficit as further provided in Section 2(d) . . . .” § 2(e). The escrow agreement further provided that

The amount of the Escrow shall initially be €2.0 million, which shall reduce to €1.0 million on the one-year anniversary of the Closing Date, €500 thousand on the two-year anniversary of the Closing Date, €400 thousand on the three-year anniversary of the Closing Date, €300 thousand on the four-year anniversary of the Closing Date and €200 thousand on the five-year anniversary of the Closing Date. Notwithstanding the preceding sentence, (i) the applicable required amount of the Escrow provided for in this Section 2(e) shall not at any time be reduced below the aggregate of all then contested amounts under the Escrow Agreement and (ii) the amount of funds available to the Buyer through the Escrow shall not be less than €400 thousand on the three-year anniversary of the Closing Date, excluding then contested amounts under the Escrow Agreement, even if such requirement results in the Seller being required to transfer additional funds into the Escrow.

Id.

The parties agree that in July of 2003 Penn World sent Pirito the Ernst & Young report which found the Net Worth to be negative €442, 000, which would result in a Net Worth Deficit of about €1, 250, 000. Pl. MSJ at 14; Def. MSJ at 16. Pirito informed Penn World that he disputed this finding, and the parties thereafter negotiated the Net Worth Deficit for several months. Id.

The parties disagree about whether they came to a substantive agreement about the Net Worth Deficit: Penn World maintains that it made a revised offer on October 29, 2003, and in December of that year Pirito’s lawyer told Penn World Pirito accepted that offer with one condition to which Penn World agreed. Def. MSJ at 17. According to Penn World, in order to avoid arbitration, “[a]ll that had to be done was for the parties to carry [the agreement] out by sending the necessary Joint Written instructions to the Escrow Agent, whereby some funds would be wired to Penn World and all the rest would stay in escrow”, id., but as the first anniversary of the closing date approached, Pirito “started playing games”. Id. Penn World avers that on February 4, 2004 -- the day before the one-year anniversary -- Pirito’s lawyer informed Penn World that Pirito was in Brazil and would not sign the instructions to the Escrow Agent, but would instead “clarify and finalize” the agreement “in about a week”. Id. at 18; Declaration of Richard Davies, Def. MSJ Ex. 41 ¶ 20. Penn World, fearing the Escrow Agent would automatically release the funds on February 5, 2004 if it had not yet initiated arbitration proceedings, “notified the Escrow Agent of its intent to file for arbitration in an effort to prevent the escrow release”, Def. MSJ at 18; Cohen Dep., Def. MSJ Ex. 4, at 235:2-10.

According to Pirito, “[t]he parties negotiated the calculation of the [Net Worth Deficit] for several months, ” but “by January 27, 2004, the parties still had not reached an agreement”, Br. in Supp. of Pl.’s MSJ (hereinafter “Pl. MSJ”) at 15.

On February 5, 2004, Pirito’s lawyer sent a letter informing the Escrow Agent that “no arbitration has being [sic] initiated between the Purchaser and the Seller.” Def. MSJ Ex. 42. That day the Escrow Agent released €1 million to Pirito. Pl. MSJ at 15-16; Def. MSJ at 18.

On January 26, 2005, Penn World filed a Request for Arbitration seeking reimbursement for the Net Worth Deficit, damages, and a binding interpretation regarding the § 2(e) provision in the SPA by which Penn World had the right to receive from escrow “the amount, if any, by which the Reduction Threshold (as defined in Appendix B [to the SPA]) exceeds positive amounts resulting from the Earn-Out calculation not paid to [Pirito] as a result of the Reduction Threshold (the ‘Reduction Amount’)[4]”. Penn World claims this would result in a total award of about €2.9 million. Def. MSJ at 8.

B. The Real Property Agreement Dispute

On February 22, 2005, Pirito exercised the “call option” by giving Penn World notice of his intent to buy back land and real property (collectively the “real property”) that M.A.E. owned in Offanengo, Italy. See SPA, Def. MSJ Ex. 1 at 4.

The SPA provided a process -- contained in § 2(f) and titled the “Real Property Agreement” (“RPA”) -- by which Pirito could buy the real property back from Penn World. The questions of whether Penn World had an obligation to sell the real property to Pirito under the RPA and whether Penn World breached that obligation is at the heart of both summary judgment motions. We will therefore recount in detail the terms of the agreement and the parties’ actions regarding the purchase of the real property.

The RPA provides,
Upon delivery of a written notice delivered to the Seller 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 to the Seller on the third anniversary of the Closing Date.

§ 2(f)(i).

The parties do not dispute that on February 22, 2005, Pirito sent a letter to Penn World giving notice of his intent to purchase the real property pursuant to § 2(f). See Pl. MSJ at 16; February 22, 2005 Letter, Pl. MSJ Ex. 78. Because the closing happened on February 5, 2003, this notice was timely under the SPA.

The SPA provides a formula for determining the Real Property Payment Amount. If Pirito exercised his option to buy the property,

on the third anniversary of the Closing Date, the Seller w[ould] (X) either pay off or assume the outstanding debt service obligation for the Real Property and (Y) pay the Company an amount equal to (A) the amount by which the debt service obligations paid by the Company with respect to the Real Property during the three-year period exceeded €1.02 million plus (B) the amount of real estate taxes paid with respect to the Real Property over the three-year period plus (C) the present value, determined as of the date of the closing of the sale of the Real Property using the Applicable Rate, of the amount of any taxes . . . determined at the time of the sale of the Real Property . . . plus (D) the aggregate amount of any costs and expenses incurred by the Company during the three-year period to remediate any asbestos contamination.

§ 2(f)(iii) (emphasis added).

The RPA continues, “To effectuate such purchase, promptly upon agreement on the Real Property Payment Amount to be paid to the Company pursuant to subsection (iii), the Seller and the Company shall enter into an agreement with respect to the sale of the Real Property . . . .” § 2(f)(i).

The RPA provides a specific process for reaching an agreement as to these amounts. Upon delivery of Pirito’s notice that he was exercising his option, Penn World was to “compute the amount owed . . . pursuant to clause (Y) . . . and provide notice of such computation to [Pirito].” § 2(f)(iii). The parties agree that on March 17, 2005 Penn World’s lawyer, Frederick W. Dreher, Esq., wrote to Pirito setting forth the Real Property Payment Amount Penn World had calculated. Def. MSJ at 9; Def. MSJ Ex. 9; Pl. MSJ at 16. Penn World proposed a Real Property Payment Amount of €3, 768, 090, plus the present value of any taxes incurred by M.A.E. as a result of selling the real property. Def. MSJ Ex. 9. The €3, 768, 090 included €716, 599 in debt service obligations under § 2(f)(iii)(Y)(A), €56, 982 in real estate taxes under § 2(f)(iii)(Y)(B), and €2, 994, 509, which Penn World alleged was “the outstanding amounts currently owed by [Pirito] to [Penn World] with respect to the Net Worth Deficit . . . the Reduction Amount . . . Slow Moving Inventory and Obsolete Inventory . . . and [Pirito’s] breach of the representation and warranty in Section 4(d) . . . .” Id.

The RPA provides that “[w]ithin fifteen business days, [Pirito] shall provide to [Penn World] a written response . . . in which [Pirito] shall (i) agree that the proposed Real Property Payment Amount is accurate or (ii) disagree that the proposed Real Property Payment Amount is accurate.” § 2(f)(iii). Given the tenor of the parties’ interactions by this point, it comes as no surprise that Pirito did not agree with Penn World’s proposed Real Property Payment Amount; Pirito’s lawyer timely informed Penn World of Pirito's objection in a March 23, 2005 letter. Def. MSJ at 9; Pl. MSJ at 16; Def. MSJ Ex. 10.

According to the RPA, “If [Pirito] provides a Response Notice indicating that the Real Property Payment Amount is inaccurate, then the Parties shall negotiate such matter in good faith for fifteen business days.” § 2(f)(iii). The RPA then provides that

If no resolution can be reached by the end of [the negotiation] period, the decision as to the proper Real Property Payment Amount as computed in accordance with clause (Y) shall be submitted upon request of either or both Parties to a sole arbitrator to be appointed by the President of the National and International Arbitration of Milan . . .

§ 2(f)(iii) (emphasis added). The parties disagree about whether they had reached a resolution by the end of the negotiation period.

Penn World contends that the parties never reached an agreement as to the Real Property Payment Amount. In the March 23, 2005 letter informing Penn World of Pirito’s objections, Pirito’s lawyers wrote “Our client reserves his position with regard to the amounts claimed by way of debt service obligations and real estate taxes and rejects any suggestion that any outstanding amount is owed under Section 2(f)(vii) of the Agreement”. Pirito’s counsel further explained that because “the amounts claimed by [Penn World] as ‘outstanding amounts’ are subject to ongoing arbitration proceedings and fully disputed, ” Pirito “takes the view that the inclusion of these amounts in the Real Property Payment Amount is an indication of bad faith on [Penn World]’s part.” March 23, 2005 Letter, Def. MSJ Ex. 10. Penn World’s lawyer Dreher responded on April 28, 2005, objecting to the allegation of bad faith on Penn World’s part and arguing:

we have reviewed the Agreement and disagree with your assessment that there are not “outstanding amounts” owed under the Agreement. The purpose of the arbitration, in our client’s view, is to cause Mr. Pirito to pay outstanding amounts that he has unreasonably refused to pay to date . . . as provided by the Agreement, there would be a reduction in the proposed Real Property Payment Amount to the extent a portion of the outstanding amounts remain contested under the Escrow Agreement. The amount contested under the Escrow Agreement at the time of sale cannot be determined at this time.

April 28, 2005 Letter; Def. MSJ Ex. 11. Dreher then reminded Pirito’s counsel that Pirito was obligated to ensure that “the Escrow holds not less than €400, 000 on the date of closing of the sale of the Real Property”, excluding “any amounts that may be contested under the Escrow Agreement at that time”. Id. Dreher noted that Penn World “otherwise reiterates its calculation of the Real Property Payment Amount as described in our March 17, 2005 letter” and informed Pirito’s counsel that the April 28 letter triggered the fifteen day negotiation period under § 2(f)(iii).

On May 11, 2005, Pirito’s counsel responded that “the inclusion of the ‘outstanding amounts’ in the Real Property Calculation will make that calculation unacceptable to our client, leading to a dispute in relation to the Real Property Calculation.” May 11, 2005 Letter, Def. MSJ Ex. 12.

Six days later, Dreher sent a letter to Pirito’s lawyers confirming that the negotiation period had ended and that Penn World “concur[ed] with [Pirito’s lawyers’] assessment that there is a dispute with respect the the [sic] calculation of the Real Property Payment Amount.” May 17, 2005 Letter, Def. MSJ Ex. 43.

Penn World contends that in light of these discussions the parties never reached an agreement as to the Real Property Payment Amount. Def. MSJ at 9. Pirito disagrees and asserts that “the parties did not dispute the calculation of the Real Property Payment Amount and did not have anything to arbitrate under Section 2(f)(iii).” Pl. Resp. in Opp. at 6. Pirito does not cite any evidence in the record contemporaneous with the negotiation period that could fairly be read as constituting Pirito's agreement with Penn World’s calculations. Instead, he justifies his argument that the parties reached a resolution as to the Real Property Payment Amount by drawing a distinction between disputes over outstanding amounts owed pursuant to § 2(f)(vii) on the one hand, and real estate tax and debt service amounts owed pursuant to § 2(f)(iii) on the other, with only the latter matters subject to the arbitration provision. Pirito claims that he agreed to Penn World’s calculations with regard to amounts owed under § 2(f)(iii), and in support he points to his recent ...


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