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Vitarroz Corp. v. G. Willi Food International Ltd.

June 26, 2009

VITARROZ CORPORATION, PLAINTIFF,
v.
G. WILLI FOOD INTERNATIONAL LTD.; WILLI USA HOLDINGS, INC.; ZWI WILLIGER, DEFENDANTS/THIRD-PARTY PLAINTIFFS,
v.
STEVE WEINREB; ARTIE WEINREB, THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Katharine S. Hayden, U.S.D.J.

OPINION

Before the Court are two motions: one to confirm an arbitration award (the "Award") pursuant to § 9 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq., and another to vacate the same Award pursuant to § 10 of the FAA. For the reasons discussed below, the Court will grant the former, deny the latter, confirm the arbitration award, and enter judgment accordingly.

I. FACTUAL BACKGROUND & PROCEDURAL HISTORY*fn1

This breach of contract and trade libel action arose from a defunct merger agreement between the parties. Plaintiff Vitarroz Corporation ("Vitarroz") is a New Jersey distributor of ethnic food products. Am. Compl. ¶ 1. Defendant Willi USA Holdings, Inc. ("WHI") is a Delaware corporation and is a wholly owned subsidiary of co-defendant G. Willi Food International, Ltd. ("GWFIL"), a publicly traded company that supplies kosher food products throughout the world. Am. Compl. ¶ 2. Zwi Williger is the Chairman and Chief Operating Officer of GWFIL, and is also an officer of WHI. On June 20, 2005, the parties signed a Contribution Agreement (the "Agreement") for the purpose of forming a new corporate entity ("New Vitarroz"), under which Vitarroz would contribute substantially all of its assets and business, and defendants would contribute cash and ultimately own New Vitarroz (Vitarroz would have an opportunity to procure an ownership interest under the Agreement as well). Am. Compl. ¶¶ 6-8. The Agreement set the closing date for August 31, 2005. Am. Compl. ¶ 9. Williger, in his representative capacity, signed the Agreement on behalf of WHI, which had been established for the "purpose of engaging in the transaction with Vitarroz." Award at 9. Neither GWFIL nor Williger (in his personal capacity) was a signatory. Declaration of Peter J. Kurshan ("Kurshan Decl."), Exh. A at 39.

Section 7.08 of the Agreement set forth detailed confidentiality requirements that applied before and after the transaction's closing date; the parties also agreed that the confidentiality provisions would survive if the acquisition was not completed for any reason. Am. Compl. ¶¶ 10-18; Kurshan Decl., Exh. A at 24-26. Relevant here, the parties agreed to keep confidential certain information obtained in due diligence, including "the existence and terms of the [Agreement], as well as all information and records, whether written or oral, which were obtained, directly or indirectly, from the other party concerning the business of the other party." Am. Compl. ¶ 10; Def. Br. at 4.

The closing date passed without consummation. Defendants requested an extension to complete their due diligence, but Vitarroz rejected the request, declaring that time was of the essence. Am. Compl. ¶ 21. Defendants eventually informed Vitarroz that they were no longer interested in closing the Agreement. Am. Compl. ¶ 22.

Thereafter, on September 26, 2005, defendants' counsel delivered to Vitarroz's counsel a proposed press release announcing the termination of the Agreement, which read in pertinent part: "As part of our due diligence process, we conducted a detailed review of the financial condition of Vitarroz. It is unfortunate that as a result of issues that arose during the due diligence process [defendants] ha[ve] elected not to go forward with the acquisition of Vitarroz." Am. Compl. ¶ 23. Vitarroz immediately rejected the proposed language, and substituted its own proposed revisions. Am. Compl. ¶ 25. Defendants, in turn, rejected the counter-proposal and issued the unaltered press release the next morning, on September 27, 2005. Am. Compl. ¶ 26.*fn2

As a result of the press release, Vitarroz filed suit in New Jersey Superior Court on October 11, 2005, and defendants removed on diversity grounds to this Court on November 14, 2005 [D.E. # 1].*fn3 Vitarroz filed an amended complaint on January 6, 2006 [D.E. # 6], asserting causes of action for, inter alia, breach of contract, breach of the implied duty of good faith and fair dealing, tortious interference of contractual relations and prospective economic advantage, trade libel, and fraudulent inducement.*fn4 Am. Compl. ¶ 34-86. Specifically, Vitarroz claimed that the press release made a pejorative reference to its financial condition, which caused "substantial harm to its business by creating the erroneous impression in the minds of suppliers and customers that [it] was unstable, was experiencing serious financial problems[,] and was possibly insolvent, and could be on the verge of bankruptcy." Award at 3.

Before defendants answered, the parties agreed to arbitrate this matter as required by § 15.04 of the Agreement, and the Court dismissed the action with prejudice in a stipulation and order on May 31, 2006 [D.E. # 17]. The Court expressly retained jurisdiction "for purposes of hearing: challenges to the arbitrators; challenges to the arbitrators' award; converting any arbitration award to judgment; and enforcement of any arbitration award." Stipulation & Order, ¶ 5. Steve and Artie Weinreb-principals of Vitarroz-were not named as parties in the original complaint. Defendants evidently intended to assert third-party claims against the Weinrebs, but did not do so in this Court as a result of the dismissal. The Weinrebs consented, however, to this Court's jurisdiction for purposes of entering into arbitration under the Agreement [D.E. # 17 ¶ 2]. Defendants did subsequently assert the third-party claims (styled as "counterclaims") against the Weinrebs in the arbitration. Award at 1-2.

Before conducting an evidentiary hearing, a three-arbitrator panel permitted the parties to conduct "pre-hearing discovery . . . during which documents were exchanged, depositions were conducted[,] and the identities of expert witnesses were disclosed." Award at 6. The panel then held a five-day evidentiary hearing from April 29, 2008 to May 7, 2008, during which both parties were represented by counsel. At the hearing, plaintiff adduced testimony from nine individuals, and defendants adduced testimony from six; each witness gave testimony under direct and cross-examination.*fn5 Id. The parties also submitted "multiple volumes of documentary evidence." Id. Before the testimony of Steve Weinreb, the panel indicated to the parties for the first time, over defendants' objection, that Weinreb's testimony would be limited to 30 minutes each for direct and cross-examination because one of the arbitrators had to attend a wake. Def. Br. at 6. Defendants further allege that Weinreb's direct testimony lasted 40 minutes and, consequently, the panel limited cross-examination to 25 minutes. Id. After the proceeding concluded, the parties submitted legal memoranda, and a week later made summation arguments and answered the panel's questions via a telephonic hearing. Award at 6-7.

In its written Award, the panel concluded that the press release breached the confidentiality provisions in § 7.08 of the Agreement, and that defendants had breached their contractual duty to cooperate and their implied obligation of good faith and fair dealing due to the manner in which they issued the release The panel reasoned as follows:

[Defendants] argue that none of the statements comprising the . . . press release, either read alone or in conjunction with the other statements in the release, disclosed "Confidential Information" as defined in the . . . Agreement. But it is clear from the evidentiary record that third parties who read the release, including certain of Vitarroz's suppliers, construed the release as stating that the due diligence process yielded adverse information concerning the financial condition of Vitarroz that was of sufficient magnitude to induce [defendants] to terminate the transaction. The Panel concludes that such an interpretation was a reasonable one to draw from the language of the release stating that "issues that arose" following a "detailed review of the financial condition of Vitarroz" were responsible for [defendants'] decision "not to go forward with the acquisition of Vitarroz." The Panel further concludes that, given the exceedingly broad definition of "Confidential Information" as including "information obtained from" Vitarroz by [defendants], the adverse financial information that purportedly precipitated the termination of the transaction necessarily would have had to have been derived from "Confidential Information" discovered by [defendants] during the due diligence process.

Award at 7-8. Additionally, the panel acknowledged that GWFIL and Williger had not signed the Agreement, but nonetheless found that

WHI breached the duty to cooperate set forth in Section 7.08 of the . . . Agreement, and further violated the covenant of good faith and fair dealing, when Williger decided on behalf of [GWFIL] to issue the . . . press release without affording Vitarroz an adequate opportunity to seek a protective order prohibiting the dissemination of such release, or alternatively, modifying the language of the release.

The Panel further concludes that, under the circumstances of this case, [GWFIL] and Williger are jointly and severally liable for any damages sustained by Vitarroz as a result of the issuance of the . . . press release. . . . [T]he panel finds that [GWFIL] and Williger formed WHI for the purpose of engaging in the transaction with Vitarroz; that [GWFIL] and Williger controlled the activities of WHI; and that the acts which triggered WHI's breach of the duty to cooperate and its violation of the covenant of good faith and fair dealing were undertaken by [GWFIL] and Williger.

Id. at 9-10.

After calculating Vitarroz's damages as a result of defendants' breach and rejecting defendants' asserted counterclaims, the panel awarded Vitarroz $590,992.00. Id. at 15. Exercising its discretion, the panel declined to award pre-judgment interest, but stated that in the event that defendants failed to pay the sum awarded within 30 ...


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