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Mmpc Sub, Inc. v. Midmark Corporation

United States District Court, N.D. Illinois, Eastern Division

February 13, 2014

MMPC SUB, INC., f/k/a PROGENY, INC., Plaintiff,
v.
MIDMARK CORPORATION, Defendant.

MEMORANDUM OPINION & ORDER

JOAN B. GOTTSCHALL, District Judge.

Plaintiff MMPC Sub, Inc. ("MMPC"), formerly known as Progeny, Inc. ("Progeny"), has brought a three-count amended complaint against Midmark Corporation ("Midmark"), seeking a declaratory judgment that Midmark is barred from imposing certain accounting adjustments to Progeny's 2012 "Adjusted EBITDA."[1] The accounting adjustments that Midmark seeks to impose would result in a substantially lower 2012 earn-out payment to MMPC under the parties' 2009 Asset Purchase Agreement (the "APA"). Midmark has moved to stay this action pending arbitration. Because the court finds that the issues raised in MMPC's complaint are subject to arbitration under the APA, the court grants the motion to stay.

I. FACTS

The material facts are undisputed. Midmark manufactures and sells equipment for the medical, dental, and veterinary industries. Progeny, Inc. ("Progeny") manufactured and sold imaging equipment for those same industries. In 2009, Midmark purchased substantially all of the assets of Progeny pursuant to an asset purchase agreement. Under the APA, Midmark was to pay Progeny yearly earn-outs over the course of four years if certain performance objectives were met. If, for a given year, Progeny's "Adjusted EBITDA" exceeded the "Threshold EBITDA, " then Midmark would pay Progeny an earn-out of 6.6283395 times that difference. If the Adjusted EBITDA was less than the Threshold EBITDA, then Midmark would not pay the earn-out.

The APA set forth a process for determining the Adjusted EBITDA. First, Midmark would calculate the Adjusted EBITDA "in accordance with (i) generally accepted accounting principles... ("GAAP"), consistently applied...." (APA §§ 2.7 & 2.9.) Midmark would then deliver "to [Progeny] a certified statement setting forth in reasonable detail [Midmark's] calculation of the Adjusted EBITDA for the prior fiscal year and its calculation of the [earn-out] for such fiscal year." ( Id. § 2.7.) Progeny then had thirty days to "give[] written notice to [Midmark] disputing such statement providing reasonably detail regarding the basis of such dispute...." ( Id. ) If Progeny gave Midmark a dispute notice, then the parties were to use their best efforts to settle the dispute within thirty days. If "[a]ny such dispute" remained unresolved after the thirty-day period, then that dispute was to be submitted to an accounting firm, "who [would] act as an arbitrator and resolve the dispute in a manner consistent with the procedures set forth in Section 2.4.4." ( Id. ) Section 2.4.4, in turn, provided that "the matters objected to [by Progeny] (and only such matters)" would be submitted to the accounting firm, which would "act as an arbitrator and... resolve the dispute and submit a written statement of such resolution within thirty (30) days, which statement [would] be binding on all parties...." ( Id. § 2.4.4.)

In 2012, the last year that an earn-out was to be paid, a dispute arose concerning Midmark's calculation of Adjusted EBITDA for that year. Midmark calculated the 2012 Adjusted EBITDA to be $5, 589, 536, which was $822, 605 over 2012 Threshold EBITDA. Applying the 6.6283395 multiple to that difference, Midmark was to pay Progeny an earn-out of $5, 452, 505 according to Midmark's calculations. By Progeny's calculations, however, the 2012 Adjusted EBITDA should have been $6, 510, 829, resulting in an earn-out of $11, 355, 408-a difference of $5, 902, 903.

On April 30, 2013, counsel for Progeny's successor, MMPC, sent Midmark a letter disputing Midmark's calculation of Progeny's 2012 Adjusted EBITDA. In the letter, MMPC's counsel stated:

Midmark's positions are inconsistent with (i) the [APA's] terms; (ii) the parties' course of dealing in this and prior years, including but not limited to the [earn-out] calculated for the Progeny Division's Adjusted EBITDA in 2009, 2010, and 2011, some 45 monthly financial reports provided by Midmark employees in its Progeny Division to and accepted by Midmark senior management, and the annual financial budgets prepared by those same Progeny Division employees and blessed by Midmark's senior management and Board of Directors; (iii) Midmark's (and seemingly its auditor's) own past practices for 2009, 2010, and 2011; and (iv) Midmark's EBIT calculation earlier this year, which resulted in the payment of performance bonuses to [MMPC's former president and CEO] Ed McDonough and to Midmark's other Progeny Division employees.

(Pl.'s Reply Ex. 1 ("Dispute Notice") 3, ECF No. 21-1 (footnotes omitted).)

Unable to resolve this dispute, MMPC filed an amended complaint in this court on June 17, 2013. The complaint alleges that "Midmark has improperly made adjustments to the Progeny Division's 2012 EBITDA." (Am. Compl. ¶ 5, ECF No. 7.) MMPC further alleges that, even assuming that Midmark's adjustments are proper, Midmark is barred from seeking to impose the adjustments to Progeny's Adjusted EBITDA under the doctrines of waiver and estoppel. MMPC alleges:

The adjustments that Midmark now asserts... are inconsistent with Midmark's previous treatment of Progeny/MMPC's pre-transaction audited financial statements, how Midmark determined Adjusted EBITDA and the Contingent Purchase Price in 2009[, ] 2010[, ] and 2011, with the Midmark/Progeny Division's budget processes since Midmark's purchase of Progeny/MMPC and with its receipt and review of monthly financial and operation reports, "location review" reports, routine forecast updates, Deloitte & Touche's unquestioned audits of the 2009, 2010 and 2011 earn-out calculation, and its payments of bonuses to Mr. McDonough and key Progeny employees.

(Am. Compl. ¶ 101.)

MMPC seeks a judicial declaration that: (i) "Midmark and Progeny/MMPC did not agree to submit to the Independent Accountants the legal questions of whether or not Midmark is estopped from claiming adjustments inconsistent with prior conduct upon which MMPC relied and whether or not Midmark waived its right to claim these adjustments"; (ii) "as a matter of law, Midmark is estopped from making adjustments... that are inconsistent with Midmark's previous [accounting practices]"; and ...


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