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.