*Although an appraisal may sometimes be considered to be an arbitration, the underlying contract must specifically designate it as such. **A separate arbitration clause in the contract is evidence that the parties did not intend an appraisal to be an arbitration.
Walters vs. Boustead Securities LLC, No. G056250 (Cal. App., 4Dist., 7/11/19).
Plaintiff and three others formed the firm now known as Boustead Securities LLC. The operating agreement provided that if any of the founders left the firm, the firm would repurchase his/her shares. The agreement also provided that the departing shareholder and the firm would each hire an appraiser to determine the value of the shares and if the appraisals were more than 10% apart, then the two appraisers would hire a third appraiser, whose valuation would be “final, binding and conclusive.” Another part of the agreement contained an arbitration clause which stated that all disputes would be arbitrated before JAMS. Plaintiff ultimately withdrew from the firm. At the time, he owned 28.18% of the company. During plaintiff’s tenure with the firm, an “advance account” was created for him, with those advances to be deducted from future commissions earned. The total amount of the advances was $266,000.
The valuations by the two appraisers were more than 10% apart and so the appraisers hired Moss Adams LLP to do a third appraisal, which would be “final, binding and conclusive.” Moss Adams determined that the value of the firm was $958,000. It then “netted against equity” the $266,000 advance, for a “net equity” of $692,000. 28.18% of this figure was $195,005.60. Because this figure was less than the $266,000 advance, Moss Adams determined that plaintiff was not entitled to any funds.
Plaintiff disagreed with this analysis, and commenced an arbitration, arguing that the $266,000 constituted earnings and should not have been applied against equity. The arbitrator agreed with plaintiff. He awarded plaintiff $186,354, which was 28.18% of $958,000 less $83,610 that plaintiff purportedly owed the company. The trial court confirmed the Award and Boustead appeals. It argues that, in effect, the Moss Adams appraisal was a final and binding arbitration award and that, therefore, the arbitrator exceeded his powers by not adhering to it.
The Court of Appeal affirms. Nothing in the operating agreement refers to the appraiser’s valuation as an “arbitration” and nothing in Moss Adams’ analysis refers to an “arbitration” either. It is entitled “Valuation Analysis.” There is also the fact that the operating agreement includes a separate arbitration clause, some 18 paragraphs after the repurchase price clause, which specifically provides that all disputes would be resolved exclusively through binding arbitration conducted by JAMS. Thus, even if one were to assume there was inconsistency between the repurchase price clause and the arbitration clause, the more specific provision controls over the more general.
Boustead claims that any proceeding with certain attributes can be deemed an arbitration without regard to the parties’ intent. Although an appraisal may be an arbitration, here the parties agreed that any arbitration proceeding was to be conducted by JAMS, not Moss Adams. The most reasonable interpretation of the contact was to treat the Moss Adams appraisal as conclusive as to the value of the company, while leaving all other issues, such as how to treat advances, for determination in an arbitration proceeding before JAMS. This is exactly what the arbitrator did. He used the $958,000 valuation, referring to it, within the language of the operating agreement, as “final, binding, and conclusive.” The Moss Adams valuation was respected by the arbitrator for the specific purpose the parties agreed to in conducting the appraisal—determining the value of the company.
(SOLA Ref. No. 2019-32-02)
NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.
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