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Forsythe v. Black Hills Corp.

December 3, 2008


The opinion of the court was delivered by: Matthew F. Kennelly United States District Judge



The plaintiffs sued Black Hills Corporation in 2004, alleging breaches of a merger agreement. One of plaintiffs' claims were submitted to arbitration; other claims were litigated in this Court and ultimately were settled. On September 18, 2008, an arbitrator awarded plaintiffs $4,095,370. Plaintiffs have moved to confirm the arbitration award, and Black Hills has moved to modify or vacate the arbitration award under the Federal Arbitration Act, 9 U.S.C. §§ 9-11. For the reasons set forth below, the Court grants plaintiffs' motion and denies Black Hills' motion.


In 2000, plaintiffs Gerald Forsythe, Michelle Fawcett, Marsha Fournier, Monica Breslow, Melissa Forsythe, and John Salyer, Jr. sold Indeck Capital, Inc. to defendant Black Hills Corporation. The parties' merger agreement provided for an immediate payment to plaintiffs in the form of Black Hills stock, plus "earn-out" compensation of up to $35 million in additional Black Hills stock to be issued over the following four years. Although Black Hills paid earn-out compensation in 2000 and 2002, plaintiffs refused the 2003 earn-out compensation offered by Black Hills ($3,875,174) because they disputed the company's calculation.

In August 2004, plaintiffs filed suit against Black Hills alleging breaches of the merger agreement and seeking about $29 million in unpaid earn-out compensation. Black Hills moved to dismiss the complaint, contending that all the claims were subject to arbitration under the terms of the merger agreement.

On March 21, 2005, the Court ruled that two of plaintiffs' claims were subject to arbitration, but the remainder were not. The arbitrable claims centered around plaintiffs' allegation that Black Hills artificially depressed the earn-out amount in 2003 by improperly "writing down" the carrying value of an asset called Las Vegas Cogeneration Unit II ("LV II") and an issue concerning the timing of tax refund (the tax refund claim was later dropped). The Court retained jurisdiction over plaintiffs' other claims, and litigation on those claims proceeded.

The parties engaged the services of KPMG, LLP as arbitrator. The engagement letter for KPMG outlined the scope of the arbitration, stating that the "calculation of the 'earn-out' payment required is in dispute." Pl. Ex. 3 at 1-2. The dispute over the calculation was "the sole item submitted for dispute resolution." Id. at 2.

On March 21, 2008, the parties entered into a settlement agreement. The agreement provided that in exchange for $16 million in Black Hills common stock, the plaintiffs agreed to release all claims, "excluding the claims in Arbitration, which are not released." Pl. Ex. 5 at 5. The parties also agreed that the $16 million would count against the cap on earn-out compensation of $35 million set forth in the merger agreement. Black Hills had previously paid plaintiffs $2,365,698 and $5,084,034 in earn-out compensation for the years 2000 and 2002 respectively. As a result, any arbitration award could not exceed $11,550,268.

After the settlement, the parties had one more chance to submit arguments to the arbitrator. Plaintiffs contended that they were entitled to up to $21,882,444 in earn-out compensation, in addition to the settlement payment, because Black Hills had artificially depressed the value of the earn-out by improperly writing down the value of LV II. Black Hills argued that its writing down of that asset was proper and that plaintiffs were not entitled to any further compensation. Black Hills also contended that it had understated the impairment of LV II. As a result, Black Hills argued, any award to the plaintiffs should be offset by a percentage of the understatement.

On September 19, 2008, the arbitrator determined that "the calculation of the 'earn-out' payment due to the [plaintiffs] should not be adjusted with respect to the dispute surrounding the impairment of [LV II]." Pl. Ex. 7 at 3. The arbitrator then ordered that Black Hills pay plaintiffs $4,095,370 in Black Hills stock, the amount Black Hills had previously calculated as the 2003 earn-out compensation due to plaintiffs.

On October 15, 2008, plaintiffs moved this Court to confirm the arbitration award. A few days later, defendants moved to vacate or modify the award.


"Judicial review of arbitration awards is extremely limited." Johnson Controls, Inc. Systems & Servs. Div. v. United Ass'n of Journeymen & Apprentices of Plumbing & Pipefitting Industry of U.S. & Canada, AFL-CIO, 39 F.3d 821, 824 (7th Cir. 1994). A court may modify an award only if there was an evident material miscalculation or material mistake, the arbitrators issued an award on a matter not submitted to them, or the award contains some imperfection of form that does not affect the merits of the controversy. 9 U.S.C. ยง 11. In addition, a court may vacate an award "where the arbitrators exceeded their powers." Id. ...

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