Paul (Junior) Teutul Wins Appeal in American Chopper Buyout Lawsuit
Paul (Junior) Teutul has reason to dance after a decision by the appeals court earlier this week, reversing a lower court's ruling that would have forced him to sell his 20% interest in Orange County Choppers to his father, Paul (Senior) Teutul, at a price to be determined by the court. Teutul v. Teutul, 2010 NY Slip Op 09248 (2d Dept Dec. 14, 2010).
As I previously reported here, the lower court's April 2010 ruling enforced Senior's exercise of a buyout option contained in a January 2009 letter agreement that had temporarily patched up the father-son business relationship, and avoided cancellation of their television deal with Discovery Channel, following Senior's on-air firing of Junior. The court enforced the option notwithstanding that the buyout price was expressed in terms of "fair market value as determined by a procedure to be agreed to by the parties as soon as practicable (emphasis added)." The solution to the parties' inability to agree on valuation procedure, the court concluded, was for the court itself to step in and determine the fair market value of Junior's shares.
The court's valuation was put on hold pending Junior's appeal of the decision. I previously reported here on the argument of the appeal last October, in which Junior argued that the option was an unenforceable agreement to agree. As reported, the lawyer for Senior, who was there defending the lower court's decision, drew a series of skeptical questions from the four judges who, this week, handed down a unanimous decision accepting Junior's argument.
In its decision, the appellate court acknowledges case precedent relied on by Senior, in which courts have held that "a price term of 'fair market value' in and of itself may be 'sufficiently precise' in that generally fair market value can 'be determined objectively.'" Senior's argument falls short, however, because in his letter agreement with Junior, the parties
went further and expressly agreed to later agree on a procedure for determining the shares' fair market value. Significantly, in the context of a closely held corporation such as OCCHI, "in which ownership is generally vested in a small group of stockholders and in which the shares are not usually salable" (Kaye v Kaye, 102 AD2d 682, 686-687), any determination as to the fair market value of these shares involves a certain degree of inexact valuation and subjectivity, making the procedure by which fair market value is determined of particular importance (id.).
The court's decision also distinguishes the circumstances in Marder's Nurseries, Inc. v. Hopping, 171 AD2d 63 (2d Dept 1991), another case relied on by Senior, which upheld a court's authority to break a "stalemate" in the agreed procedure for determining fair market value by making the determination itself. Here's how the court explains the distinction:
While the parties in Marder's Nurseries v Hopping had actually agreed to a procedure for determining fair market value, albeit a "flawed" or "problematic" one (id. at 70, 73), here, the parties merely agreed to later agree on a procedure for determining fair market value, in which case it cannot be said that the parties intended to create "a complete and binding contract."
The appeals court accordingly reverses the lower court's order and grants Junior summary judgment declaring that the option agreement "is not valid or enforceable."
So what happens next? I wish I knew the answer, but I don't, mainly because I have no information about Orange County Choppers' business, balance sheet, profitability or prospects. As I previously reported, in 2009 Senior engaged his own appraiser to value OCC's shares; the appraiser apparently concluded that Junior's shares had zero value. It's a fair inference that Junior begs to differ, if nothing else based on the subsequent protracted and presumably expensive litigation battle.
Junior has asserted a number of counterclaims against Senior seeking damages for alleged self-dealing and waste of OCC assets, and also demanding access to company books and records. Will Junior expend the necessary resources to prosecute the counterclaims, or might he use them as currency for a more favorable buyout settlement? Or, as a 20% shareholder, might Junior bring a proceeding for judicial dissolution of OCC under Section 1104-a of the Business Corporation Law? Doing so would require him to prove "oppressive" or "fraudulent" conduct by Senior, or that Senior is "looting" the company. If Junior did petition for dissolution, Senior could avoid having to contest the issue by electing to purchase Junior's shares for "fair value" under BCL Section 1118, in which case Junior would be right back from whence he just escaped, namely, a valuation proceeding in front of a judge.
Enough speculation. We'll all just have to stay tuned.
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.
Court Hears Argument of Paul Jr.'s Appeal in American Chopper Buyout Dispute
The perpetual fireworks between Paul Teutul (Senior) and his son Paul M. Teutul (Junior) of American Chopper fame moved last week from the television screen to a courthouse in White Plains, New York. The occasion was the oral argument before a four-judge panel of Junior's appeal from a lower court ruling against him, enforcing Senior's "option" to purchase Junior's 20% interest in Orange County Choppers (OCC) for an amount to be determined by the court in an appraisal proceeding.
Prompted by the tremendous public interest in my prior post about the case (read here), I took some time out to attend the oral argument in person, and I was able to get hold of the briefs filed by both sides. The argument and briefs shed some additional light on the circumstances leading up to the lawsuit and, of course, on the dueling arguments supporting and challenging the lower court's decision.
By way of recap, in January 2009, after a nasty on-air spat in which Senior fired Junior, the two entered into a letter agreement that allowed Junior to continue working at OCC and avoided cancellation of their television deal with Discovery Channel, which owns The Learning Channel on which American Chopper is aired. The agreement included a sparsely worded buyout provision, stating:
[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.
In November 2009, Senior's lawyer sent a letter exercising the 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.
Junior refused the option exercise, following which Senior brought suit to enforce it. In April 2010, Orange County Supreme Court Justice Lewis Jay Lubell ruled in Senior's favor (read the decision here). Justice Lubell rejected Junior's central argument, i.e., that the language of the January 2009 letter lacked essential terms concerning the appraisal process and was merely an unenforceable "agreement to agree." Instead, Justice Lubell cited appellate precedent to hold that the court could break the stalemate by making its own finding of the fair market value of Junior's shares.
Junior appealed the decision to the Appellate Division, Second Department, which heard oral argument last week. The four-judge panel consisted of Presiding Justice Mark Dillon and Associate Justices Anita Florio, Daniel Angiolillo and Thomas Dickerson. Arguing for Junior and Senior, respectively, were Newburgh attorneys James Alexander Burke and Richard M. Mahon, II. It was, as we lawyers say, a "hot bench." The judges were well versed in the facts and legal arguments presented in the briefs, and asked pointed questions of both lawyers.
As mentioned, the briefs highlight some interesting facts not described in Justice Lubell's decision, including:
- Junior was represented in the negotiations surrounding the January 2009 letter agreement by a partner at Hughes Hubbard & Reed, a large, prominent New York City corporate law firm. Senior was represented by a partner at Devine, Markovits & Snyder, a small Albany law firm specializing in family law.
- The letter agreement was negotiated and completed under pressure of a very short, January 21, 2009 deadline imposed by Discovery Channel to cure the breach of its agreement with the Teutuls due to the disruption of filming following Senior's firing of Junior.
- The day before the agreement was finalized, Junior's lawyer sent Senior's lawyer a revised draft agreement in which he deleted the latter's proposed language appointing a specific business appraisal firm ("MPI") to value Junior's OCC shares and substituted the language that appears in the final version, referring to the determination of fair market value by "a procedure to be agreed to by the parties as soon as practicable."
- The day after the agreement was signed, Junior's lawyer sent an email to Senior's lawyer reminding him they still had to deal with "the valuation issue."
- In February 2009, Senior's lawyer advised Junior's lawyer that he was engaging MPI to conduct an updated appraisal of the company shares. In his affidavit, Junior's lawyer states that he voiced no objection to Senior obtaining the appraisal because he did not consider it binding on Junior.
- In May 2009, Senior's lawyer forwarded to Junior's lawyer MPI's appraisal report concluding that the value of Junior's shares in OCC was $0, and accordingly demanding that Junior tender his shares to Senior for $0.
- Junior's lawyer responded with a letter rejecting the proposed $0 buyout, to which Senior's lawyer replied with a note asserting that Senior was "prepared to move forward to enforce the understanding you reached with [Senior's lawyer] that MPI would be the appraiser and their numbers would be final." Junior's lawyer wrote back denying any agreement to use MPI's appraisal as a basis for buyout.
- In July 2009, Senior filed an initial lawsuit against Junior to enforce the $0 buyout. The lawsuit was withdrawn sometime before November 2009, when Senior's lawyer sent the option exercise letter that precipitated the present lawsuit.
Junior's central argument on appeal is that the January 2009 letter agreement is an unenforceable "agreement to agree." The argument has two main components. First, Junior argues that the letter agreement did not create an exercisable "option," but was only a "promise" that Junior would extend an option upon Senior's request, without specifying material terms such as the option's term or the time and manner of its exercise. Second, he argues that the letter agreement's price term -- "for fair market value, as determined by a procedure to be agreed to by the parties as soon as practicable" -- was too indefinite to be enforced because the valuation procedure and other material terms, such as the valuation date, were left for future negotiation as to which the parties never reached agreement. Junior further contends that Justice Lubell misapplied case precedent in which courts enforced contracts in the face of indefiniteness claims, where the contracts specifically provided for the binding determination of the price by a third party. Here, Junior argues, the language of the letter agreement, committing fair market value determination to future negotiations between the parties, expressly negates an intent to be bound by an "objective" third-party pricing mechanism.
Senior's brief filed with the court argues in support of Justice Lubell's order, that the January 2009 letter agreement is an enforceable, signed option agreement made for valid consideration; that the price expressed as "fair market value" constitutes an objective standard ("The fair market value 'is what it is' on the date of exercise."); and that the "only open term is the mechanism for determining fair market value, i.e., the manner of appraisal." Senior's brief also cites case precedent, including Tonkery v. Martina, 167 AD2d 860 (4th Dept 1990), aff'd, 78 NY2d 893 (1991), for the proposition that "fair market value" is "sufficiently definite as a price term" and that the court may break any stalemate by determining fair market value itself.
At oral argument, Justice Dickerson questioned Junior's lawyer whether the letter agreement would be enforceable if it contained a provision appointing an appraiser, to which Junior's lawyer responded "yes," adding that the agreement did not have such provision and, to the contrary, explicitly left the issue to future agreement of the parties. Junior's lawyer argued that, while courts are empowered to remedy a "flaw" in an otherwise agreed pricing mechanism, the letter agreement contains no agreed pricing mechanism. Fair market value, he continued, is a complex exercise when it comes to valuing shares of close corporations for which there is no ready market, requiring agreement as to basic assumptions such as the date of valuation and the applicability of discounts.
Senior's lawyer attracted a greater number of questions from the panel. Justice Dillon queried whether the appraisal mechanism enforced by the court in Marder's Nurseries, Inc. v. Hopping, 171 AD2d 63 (2d Dept 1991), upon which the lower court principally relied, was "more precise" than the provision in the Teutuls' letter agreement. Senior's lawyer agreed that it was, but insisted that the court nonetheless has authority to enforce what he characterized as the parties' clear intent to be bound, as reflected in the agreement, in regard to the conveyance of Junior's shares to Senior at the latter's option. Justice Florio asked whether the parties had merely agreed to agree in the future what fair market value would mean, to which Senior's lawyer answered that fair market value is a "well known" standard that allows computation of share price "frozen in time" as of the date of Senior's exercise of his option in November 2009. Justice Angiolillo asked what was the purpose of the language in the letter agreement, referring to a determination of fair market value by "a procedure to be agreed to by the parties as soon as practicable," other than to suggest the need for a future agreement on procedure. Senior's lawyer responded that fair market value as of a date certain is sufficient to enforce the agreement, and he also faulted Junior for what he characterized as his refusal even to respond to Senior's efforts to value the shares.
Whatever my impressions sitting in the courtroom, I've learned from experience never to predict the outcome of an appeal based on the oral argument. Likely a decision will be handed down within the next two months. I'll be sure to report on it when it happens.
For those interested in learning more about the case, here are links to the appellate briefs:
Junior's main brief (36 pages)
Senior's opposition brief (25 pages)
Junior's reply brief (15 pages)
Update: 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.
Business Divorce, American Chopper Style
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.
