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Duthie v. Matria Healthcare

August 28, 2008

ANGUS M. DUTHIE AND MICHAEL J. CONDRON, PLAINTIFFS-APPELLEES,
v.
MATRIA HEALTHCARE, INC., DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 07 C 5491-Jeffrey N. Cole, Magistrate Judge.

The opinion of the court was delivered by: Williams, Circuit Judge.

ARGUED MAY 27, 2008

Before ROVNER, WILLIAMS, and SYKES, Circuit Judges.

This case arises out of the merger of CorSolutions Medical, Inc. with a subsidiary of Matria Healthcare, Inc., in a deal worth hundreds of millions of dollars. Angus Duthie and Michael Condron were CorSolutions officers prior to the merger. We consider in this appeal whether the merger agreement mandates arbitration of fraud claims that Matria asserts against Duthie and Condron individually, seeking recovery from their personal assets. Because we conclude the agreement does not require these claims to be arbitrated, we affirm the district court's decision to enjoin Matria from pursuing the claims in a pending arbitration proceeding.

I. BACKGROUND

Matria and CorSolutions provide services to employers, health plans, and government-sponsored health care programs. Pursuant to an Agreement and Plan of Merger signed December 14, 2005 (the "Agreement"), CorSolutions agreed to merge with Coral Acquisition Corp., a Matria subsidiary. CorSolutions became the surviving corporation after the merger and a wholly-owned subsidiary of Matria. The merger agreement spanned seventy-one single-spaced pages.

Angus Duthie and Michael Condron, the plaintiffs in this case, were CorSolutions officers. Duthie was its chairman and Chief Executive Officer, and Condron served as the president and Chief Operating Officer. The two remained CorSolutions officers for a time after the merger. At the time of the merger, Duthie owned CorSolutions shares that represented a 0.45% ownership interest in the company. Condron did not own any CorSolutions shares when the Agreement was signed but became a shareholder sixteen days later, when he exercised options and acquired 124,000 shares of CorSolutions's common stock, which comprised about 2.4% of the company's outstanding shares at the time. Duthie signed the Agreement, but only in his capacity as chairman and CEO. Condron did not sign the Agreement.

Pursuant to the Agreement, $20.3 million went into the Escrow Account, an account set up to satisfy certain potential post-closing claims and adjustments contemplated by the Agreement. The Agreement appointed Coral SR, LLC as the "Stakeholder Representative," meaning that it was "constituted to act as the representative, agent, and attorney-in-fact for the Stakeholders and their successors and assigns . . . for all purposes under this Agreement, the Escrow Agreement and the Agent's Escrow Agreement." Agrt. § 2.4(a). The Agreement defines the "Stake-holders" as "the holders of Common Stock, the holders of Preferred Stock, the holders of Company Options and the holders of Company Warrants." Agrt. § 1.1. Duthie and Condron are both "Stakeholders" under the Agree-ment's definition of the term.

The Agreement provides for four different arbitration forums. The Settlement Accountant, an independent accounting firm, is to resolve post-closing disputes over balance adjustments and working capital computations. Agrt. § 2.9(b). A Tax Arbitrator, a senior tax partner in a mutually agreeable accounting firm, would resolve any tax-related matters. Agrt. § 5.12(h). The BIPA Arbitrator is to resolve disputes concerning a refund CorSolutions owed to the Centers for Medicare & Medicaid Services. Agrt. § 7.5(d). And, in the section most relevant to this case, section 7.4 provided for arbitration of certain disputes in accordance with the Commercial Arbitration rules of the American Arbitration Association ("AAA").

We would not be here, of course, if all had gone smoothly. Instead, according to Matria, the very day after the merger closed, one of CorSolutions's customers informed Matria that it planned to conduct an audit of CorSolutions's disease management programs. That was news to Matria, and it maintains that CorSolutions and its officers knew about the customer's concerns before the merger but failed to convey them to Matria.

In October 2006, Coral SR initiated AAA arbitration proceedings against Matria. Matria responded by filing a suit in the Delaware Court of Chancery seeking to enjoin the arbitration and asserting claims against Coral SR based on alleged inaccuracies in the Agreement's representations and warranties. Matria did not sue any individuals in the Delaware case. On March 1, 2007, the Delaware court held that the Agreement required arbitration of the fraud claims that Matria had asserted against Coral SR seeking recovery from the Escrow Fund. Matria Healthcare, Inc. v. Coral SR LLC, No. 2513-N, 2007 WL 763303, at * 9 (Del. Ch. Mar. 1, 2007).

Two months later, Matria asserted counterclaims in the AAA arbitration against Coral SR for fraud, equitable fraud, and breach of contract. Matria also asserted counts of fraud, equitable fraud, and breach of contract against Duthie and Condron in the same filing, alleging that the two had knowingly withheld information and made multiple misrepresentations. Duthie and Condron then moved to dismiss the claims against them in arbitration for lack of jurisdiction. The arbitration panel denied the motion. Duthie and Condron subsequently filed a complaint seeking a declaration that Matria's claims against them were not arbitrable and a preliminary injunction preventing Matria from proceeding against them in the arbitration. The magistrate judge entered an order preliminarily enjoining Matria from proceeding in the arbitration against Duthie and Condron, and Matria appeals from that decision.

II. ANALYSIS

This case involves a complex transaction that yielded complex documentation; we begin with first principles. "Although the Federal Arbitration Act favors resolution of disputes through arbitration, its provisions are not to be construed so broadly as to include claims that were never intended for arbitration." Continental Cas. Co. v. Am. Nat. Ins. Co., 417 F.3d 727, 730 (7th Cir. 2005) (quoting Am. Logistics, Inc. v. Catellus Dev. Corp., 319 F.3d 921, 929 (7th Cir. 2003)). That is, "arbitration is a matter of con-tract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) (citation omitted).

Whether a particular dispute must be arbitrated is generally a question for judicial determination, unless the parties "clearly and unmistakably" provided otherwise in their agreement. Id. Neither party disputes that the court, and not the arbitration panel, should decide the arbitrability question in this case. Nor is there ...


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