Inaugural Case of the Year – Yakuel v. Gluck
As a New Year’s treat, this week’s post will be a twofer. We will now discuss Yakuel v. Gluck, a convoluted case involving the entity Agency Within LLC (hereby referred to as the “Company”). The Company’s Shareholder and LLC Agreements priced a buy-out option subject to the “final and binding” determination of a third-party appraiser, while also including broad arbitration clauses granting similar authority to the arbitrator. As you might expect, this raises questions as to what happens when a dispute erupts over the appraisal process and the resulting appraisal. Does an arbitrator’s authority begin and end with a determination of whether the appraisal process adhered to the agreement? Or can the arbitrator take it a step further, notwithstanding the agreement’s assignment of finality to the appraiser’s determination, by taking valuation evidence and awarding a buy-out price that differs from the one challenged? These questions, along with the case’s complex array of facts and tangible takeaways, are the reasons why Yakuel v. Gluck has been identified as our inaugural “Case of the Year.”
Yakuel v. Gluck – The Facts
Joseph Yakuel, owner of 65% membership interest in the Company, and Andrew Gluck, owner of the remaining 35% interest, amended their LLC Agreement on March 23, 2018. The “Amendment,” gave the Company (effectively, Yakuel) the option to repurchase all (but not less than all) of Gluck’s Units for a Purchase Price determined by the Fair Market Value (“FMV”) of those Units. Less than two months after the Amendment, the Company notified Gluck that it was exercising the repurchase option, engaging PricewaterhouseCoopers (PwC), “whose appraisal [was to be be] final and binding on all parties.” Andrew Gluck challenged the $4.7 million “FMV” appraisal by PwC of his 35% membership interest. Gluck claimed Yakuel rigged the appraisal by feeding PwC false financial projections designed to depress company value while at the same time excluding Gluck from participation in the appraisal process.
Arbitration ensued, resulting in three main conclusions. First, the arbitrator could not “evaluate PwC’s determination of the appraisal value but may determine if Yakuel breached the Repurchase Option, preventing Gluck from participating in the appraisal.” Second, Yakuel breached the Repurchase Option by not allowing Gluck to participate meaningfully in the appraisal. Third, Gluck was entitled to “damages” from Yakuel’s breach equal to “the difference between the PwC valuation of his units ($4.7 million) and the amount he would have received had [Yakuel] not breached ($23.6 million, as found by Gluck’s selected appraiser)”. Thus, the arbitrator ordered the Company to pay Gluck $18.9 million.
Dueling Petitions to Confirm and Vacate the Arbitration Award
Following the arbitration, the appraisal controversy moved to NY Supreme Court. Yakuel argued the arbitration award should be vacated as the arbitrator ignored the Repurchase Option’s explicit delegation of the “final and binding” valuation to the selected appraiser (PwC), instead adopting the new appraisal performed by Gluck’s expert appraiser. Yakuel claimed that, by doing so, the arbitrator exceeded his authority and jurisdiction. Yakuel relied heavily on the 2001 Southern District of NY federal court case, Katz v. Feinberg, in which the court vacated an arbitration award on similar grounds.
Gluck argued to enforce both the arbitration award as well as the PwC appraisal, citing the “very high bar required to vacate an arbitration award” and the broad remedial authority possessed by arbitrators in “measuring damages for a contractual breach”. Gluck further claimed, on procedural grounds, that Yakuel waived any objections to arbitrating over the appraisal. Alternatively, Gluck argued that, were the court to vacate the arbitration award, it should also vacate the PwC appraisal based on the denial of his right to participate in the appraisal process.
Justice Cohen opined that an appraisal award may be set aside “in equity” where a party is denied the opportunity to be heard or the “fundamental procedural right” to have the appraiser “receive all pertinent evidence.”
Justice Cohen ultimately upheld the arbitrator’s finding with respect to Gluck’s improper exclusion from the appraisal process and its impact on PwC’s valuation. However, Justice Cohen stated, “the question of the valuation of the shares was unequivocally and finally delegated to an appraisal, and all other general issues were delegated to potentially arbitration. And I think the [Katz v. Feinberg] court makes very, very clear when you have a specific delegation for certain issues, that controls over a general delegation over other issues and I think this is exactly that case. . . And as the Katz court said here, the agreement did not, ‘allow for arbitration of the valuation or a remedy which alters it.’”
On that basis he vacated the arbitrator’s $18.9 million award, and vacated the PwC appraisal award, directing the parties to “select a new appraiser, not PwC, consistent with the terms of their agreement.” As Justice Cohen stated, “what comes through very, very clearly is that the parties agreed to have the shares valued by an appraiser and that’s what should happen”. In other words, the arbitrator should not have the authority to conduct an appraisal.
Considerations & Takeaways
Assuming the parties proceed to a new appraisal by a new, neutral appraiser, they likely will need to agree up front on specific ground rules for participation in the process. Hopefully the new, third appraisal can come to a valuation unfettered from the prior two appraisals and make some sense out of the $18.9 million appraisal discrepancy.
The use of multiple appraisers tends to circumvent this issue as each side has access to the same information and gets its own appraisal, which are then averaged if they fall within a specified range of each other and, if not, a third appraiser chosen by the first two does an appraisal which then gets averaged with the closer of the first two appraisals. The averaging with the third appraisal incentivizes the parties to keep the first two appraisals reasonable.
Generally, the more detail in the buy-out provision of an agreement concerning the valuation parameters — standard of value, premise of value, valuation date, guidelines for income statement normalizations, applicability of discounts, etc. — the better.
And now, from us and ours to you and yours, Happy New Year!