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.