Have you heard about the episode of American Chopper in which Paul Sr. and Paul Jr. rev up their litigators and duke it out in the courtroom in a shareholder dispute?
For all you recent arrivals from Mars, American Chopper is a highly successful reality television series that first aired on the Discovery Channel in 2003, and later moved to The Learning Channel (TLC). The program centers on a custom motorcycle design and fabrication workshop in Newburgh, New York, known as Orange County Choppers ("OCC"), owned and operated by the Fu-Manchu-mustachioed, barrel-chested, tatooed father, Paul Teutul ("Senior"), and his wool-capped, design-wizard son Paul M. Teutul ("Junior"). Here’s how American Chopper’s Wikipedia entry describes the onscreen fireworks between the two:
The contrasting attitudes of the two men and their propensity for sulking often lead to fiery, but humorous, exchanges as they meet unusually short deadlines for building distinctive custom choppers.
The Teutuls founded OCC in 1999, owned 80% by Senior and 20% by Junior. In January 2008, OCC and Junior entered into an employment agreement with a non-competition clause. At the end of 2008, Senior famously fired Junior after they got into a nasty, chair-throwing, on-camera argument that was aired in April 2009.
In January 2009, after TLC gave the Teutuls a notice of default due to Junior’s departure, Senior and Junior entered into a letter agreement modifying the 2008 employment contract under which Junior resumed work as an independent contractor. The letter agreement also gave Senior the following option to acquire Junior’s 20% interest in OCC:
[Junior] shall extend to [Senior], upon [Senior's] request, an option to purchase all of his shares in Orange County Choppers Holdings, Inc. for fair market value as determined by a procedure to be agreed to by the parties as soon as practicable.
Yes, dear readers, that’s all they wrote. No mention of how long the option lasts or how it gets exercised. No mention of a valuation date. No mention of any adjustments to OCC’s income statement or balance sheet. No mention of whether and how to factor into fair market value the continuation or not of the American Chopper series, or Junior’s ongoing services to OCC. No mention of terms of the buyout payment. And last but certainly not least, no mention of who decides fair market value and a timetable for doing so. Can you see what’s coming next?
In November 2009, Senior’s lawyer sent a letter exercising his option as follows:
[T]his letter will constitute a formal exercise of the option provided for in the Letter Agreement dated January 21, 2009, effective immediately, November 19, 2009, at the current fair market value. . . . It is now left to the parties to determine the logistics of agreeing upon or ascertaining the fair market value of [Junior's] stock interests. Please contact the undersigned so that we can discuss the procedure moving forward.
The buyout discussions either never got off the ground or quickly reached impasse, because in late 2009 Senior filed a lawsuit against Junior in Orange County Supreme Court seeking specific enforcement of his option including the appointment of an independent appraiser to value Junior’s shares. Junior disputed the enforceability of the option and countersued for self-dealing and corporate waste by Senior. (Read here a copy of Junior’s December 2009 answer with counterclaims.)
In January 2010, Junior applied to the court for a preliminary injunction restraining Senior from engaging in various unilateral business transactions and compelling Junior’s access to books and records. Senior responded with a cross-motion for summary judgment on his claims to enforce the buyout option.
The task fell to Supreme Court Justice Lewis Jay Lubell to determine whether the January 2009 letter agreement, which expressly left to future accord the means of determining the shares’ fair market value, constituted a sufficiently definite, enforceable option agreement or, as Junior contended, was merely an unenforceable agreement to agree.
In his decision in Teutul v. Teutul, 2010 NY Slip Op 30979(U) (Sup Ct Orange County Apr. 21, 2010), Justice Lubell frames the issue as whether the letter agreement satisfies the basic contract requirement of definiteness. Quoting from the New York Court of Appeals’ ruling in Cobble Hill Nursing Home, Inc. v. Henry and Warren Corp., 74 NY2d 475, 482 (1989), he observes:
Before rejecting an agreement as indefinite, a court must be satisfied that the agreement cannot be rendered reasonably certain by reference to an extrinsic standard that makes its meaning clear (1 Williston, Contracts §47, at 153-156 [3rd ed 1957]). The conclusion that a party’s promise should be ignored as meaningless "is at best a last resort".
In Teutul, the extrinsic standard used in the January 2009 agreement — fair market value — is a well-defined appraisal standard. The problem is, fair market value is not readily ascertainable in the case of a closed corporation such as OCC whose shares are not publicly traded, and where there are no comparable sales data. Absent an agreed formula, the value of the company’s shares can be determined only by an appraisal process which the parties deliberately failed to spell out in their January 2009 agreement.
Justice Lubell’s opinion discusses several cases, including the above-mentioned Cobble Hill, in which the courts enforced option agreements that expressly delegated the determination of price to one or more unidentified third-party appraisers or arbitrators — a feature lacking in Teutul. He nonetheless concluded that the January 2009 option agreement was enforceable, primarily under the authority of Marder’s Nurseries, Inc. v. Hopping, 171 AD2d 63 (2d Dept 1991).
Marder’s involved enforcement of an option to purchase real estate. The purchase price was to be set by two appraisers, one appointed by each party, who were then to "diligently proceed to agree on the fair market value." If they didn’t agree, the agreement required the two appraisers to appoint a third appraiser. The purchase price would then be fixed by "the decision of any two of such appraisers." The agreement made no provision, however, for the failure of the two party-appointed appraisers to agree on a third appraiser, or for the possibility that no two of the three appraisers would agree on a price. The appellate court in Marder’s held that the option agreement, while "flawed," was "reasonably certain," explaining that
a contract should not be canceled solely on the ground that the parties, having stipulated that the purchase price was to be determined by a group of appraisers, failed to foresee all possible obstacles or hindrances which might arise during the course of the appraisal procedure. . . . That the procedure by which the "fair market value" is to be determined lends itself to stalemate is not a fatal defect since . . . a court may break any stalemate by determining fair market value itself. . . . The judgment under review in the present case, as we view it, properly reserves to the court the power, upon application of a party, to appoint a third appraiser and, in the event that two of the three appraisers are unable to reach an accord, to make its own finding as to the fair market value of the premises.
Does Teutul, in which the option agreement contained no procedure whatsoever for price determination, push Marder’s logic farther than it warrants? Justice Lubell rejects this notion, stating:
This Court sees no distinguishable difference between the authority of this Court to select an appraiser, upon application, or to "fix the fair market value after a hearing" where, as in [Marder's], the option contains a "seriously flawed" method with which to determine fair market value and where, as here, the parties have never come to terms on the method to be used to determine fair market value. The authority of the Court recognized in [Marder's] to resolve the parties’ stalemate is no less intrusive on the contractual rights of the parties than where, as here, the parties have yet to define the procedure to be employed to determine fair market value on the option exercise date. In fact, an argument can be made that the latter is less so.
Justice Lubell accordingly granted Senior summary judgment on his claim for specific enforcement of the buyout option, but he denied Senior’s request to appoint a third-party appraiser to value the shares. Instead, he decided to appoint a neutral appraiser to be jointly selected by the parties or, failing that, by the court. In the event the parties do not agree to be bound by the neutral appraiser’s valuation, Justice Lubell ordered that the court itself will conduct a valuation hearing at which the neutral appraiser as well as the parties’ own appraisers may offer evidence of value.
What does all this mean for the American Chopper television series? Apparently not much. In the wake of the lawsuit’s filing, in February 2010, TLC announced the program’s cancellation. Two months later, however, TLC announced that Senior and Junior will return for a new, seventh season, even though the pair reportedly have been incommunicado for a year and Junior recently opened his own, nearby competing motorcycle business called Paul Jr. Designs. Will Junior’s new motorcycle creations, instead of carrying names like those of his famous Black Widow Bike and Fire Bike, be called the Corporate Waste Bike or the Summary Judgment Bike in honor of his litigation travails? How about the Business Divorce Bike, with wheels that spin in opposite directions? Stay tuned.
Update #1: The valuation proceeding is on hold. Paul Jr. filed an appeal from the court’s order. On June 9, 2010, the appellate court granted his motion to stay the valuation hearing pending determination of the appeal. You can view the order here.
Update #2: By order dated Juy 26, 2010 (read here), Justice Lubell denied Senior’s application to reconsider certain aspects of his prior ruling including those giving Junior access to OCC’s books and records, granted Junior’s application for leave to serve an amended answer and counterclaims, and denied Junior’s application for summary judgment on certain of his counterclaims including that Senior failed to convey an additional 10% of the company over to him.
Update #3: The Appellate Division has scheduled oral argument of Paul Jr.’s appeal at 10:00 a.m. on October 12, 2010, at the courthouse in White Plains, New York.
Update #4: I stopped by the White Plains courthouse today (10/12/10) to watch the oral argument of Paul’s appeal. It was a lively argument with lots of questions from the judges. I’ll post on it at greater length this coming Monday (10/18/10). A decision can be expected in the next 30-60 days.
Update #5: Read here my post on the hearing of Junior’s appeal by the Apellate Division, Second Department, on October 12, 2010.
Update #6: On December 14, 2010, the Appellate Division issued its ruling granting Junior’s appeal and declaring the option agreement invalid and unenforceable. I’ve posted on it here.
Update January 18, 2011: I’m advised that the trial judge in the Teutul case, Justice Lewis Lubell, no longer sits in Orange County as a result of which the case was reassigned to Justice John McGuirk who held a status conference on January 10, 2011, and is scheduled for another conference on January 24. No other information is available at this time.
Update January 25, 2011: The Court website shows that a conference with Justice McGuirk was held yesterday, January 24th, and the next one is scheduled on February 10th. A reader comment posted today reports talk of a buyout settlement coming out of the New York IMS show. I can’t confirm.
Update February 8, 2011: An article in today’s NY Times states that the litigation-injected father-son dispute has been good for American Chopper’s TV ratings. Good to know the Times is only about a year behind the news.
Update February 12, 2011: The Court website shows that another conference with Justice McGuirk was held on February 10th, and another one is scheduled for February 23rd. The frequent conferences hint at ongoing settlement negotiations, but only the parties and their lawyers really know.
Update February 21, 2011: An astute reader alerted me that the court’s calender now lists the case as "disposed" which translates as settled. No other details are available at this time.