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Fresh Eggs Manager, LLC v. Ohio Fresh Eggs

Court of Appeals of Ohio, Tenth District

August 8, 2013

Fresh Eggs Manager, LLC, Plaintiff-Appellee,
v.
Ohio Fresh Eggs et al., Defendants-Appellants.

APPEAL from the Franklin County Court of Common Pleas. C.P.C. No. 12CVH-01-104

James E. Arnold & Associates, LPA, W. Evan Price, II, and Scott J. Stitt, for appellee.

Crabb Brown & James, LLP, and John C. Albert; Bradshaw Fowler Proctor & Fairgrave, PC, and Todd A. Strother, for appellants.

DECISION

SADLER, J.

{¶ 1} Appellants, Ohio Fresh Eggs ("OFE") and Austin J. DeCoster, appeal from a judgment of the Franklin County Court of Common Pleas denying their motion to vacate and confirming an arbitration award issued in favor of appellee, Fresh Eggs Manager, LLC ("FEM"). For the reasons that follow, we affirm the judgment of the trial court.

I. FACTUAL AND PROCEDURAL HISTORY

{¶ 2} The parties have not challenged the underlying facts as summarized in the arbitrator's award; therefore, like the trial court, we utilize those facts to form the basis of our factual summarization. This matter involves two large commercial egg-laying facilities located in Ohio that, prior to December 2003, were owned and operated by Anton Pohlman through his company Buckeye Egg Farm, L.P. Pohlman was interested in selling the two facilities and DeCoster was interested in acquiring them. However, due to difficulties in DeCoster being able to obtain the necessary permits and licenses, DeCoster sought to accomplish this without noticeable and direct involvement. Accordingly, in December 2003, several agreements were entered into that, in essence, provided that OFE would finance the acquisition and operation of the two egg-laying facilities and FEM would provide management services to OFE. Under the agreements entered into by the parties, DeCoster personally guaranteed OFE's financial and other performances, and, in return, DeCoster, or entities controlled or owned by him, would receive all profits generated by OFE after payment of requisite expenses. One of the parties' agreements, the Consulting and Management Agreement ("CMA"), provided for FEM's base compensation and bonus compensation. The dispute herein involves only the calculation and payment of bonus compensation; therefore, we do not reproduce the provision of the CMA pertaining to base compensation. In relevant part, the provision in the CMA regarding bonus compensation provides:

(b) Bonus Compensation.
(i). OFE shall pay FEM bonus compensation to compensate it for its efforts on behalf of OFE (the "Bonus Compensation"). Such Bonus Compensation, computed on an annual basis (June 1 to May 31), shall be an amount equal to five percent (5%) of the Adjusted Net Income of Fresh Eggs for such year reduced to the extent of any prior year's net operating losses (computed similarly to the calculation of the Adjusted Net Income) that have not been offset by later years Adjusted Net Income. The Bonus Compensation shall be paid within thirty (30) days of the accountant's issuance of his/her Final Report.
(ii). For purposes of this calculation, Adjusted Net Income is defined as the Net Income of OFE computed in accordance with Generally Accepted Accounting Principles (GAAP) consistent with or subject to the following adjustments: (1) no provision or reduction for income taxes shall be made; (2) Depreciation (or amortization) on all capital assets and improvements shall be depreciated over a ten year straight life method. All expenditure for the initial required improvements shall be capitalized and treated as 10 year life assets. Thereafter, repairs of less than $5, 000.00 may be expensed and items under $5, 000.00 may be expensed even if normally capitalized.
(iii). Interest paid or accruable on loans from commercial lenders shall be an expense for Adjusted Net Income hereunder under as determined under GAAP. Any loans by individual investors, Members or any other party otherwise having an interest in the profits or losses of OFE shall be computed at Wall Street Journal Prime Rate plus one percent (1%). In addition, for purposes of calculating Adjusted Net Income, a "deemed" interest expense on the initial capital investment of the Members equal to Wall Street Journal Prime Rate plus one percent shall be used.

{¶ 3} The parties made subsequent amendments to their agreements; however, none made any substantive changes to either the CMAs bonus compensation provision or DeCoster's personal guaranty obligations. In accordance with the CMAs bonus compensation provision, FEM received a bonus from OFE for part of the year ending in 2004. After that time, the egg market declined and did not show improvement until 2006. Because of the decline in the egg market, in fiscal years ending in 2005 and 2006, OFE incurred significant losses which ultimately threatened OFE's grain license, the loss of which would further harm the company's finances. To remedy the problem of OFE's falling net worth, DeCoster agreed to write off $25.5 million of debt on the company's financial statement. This debt was owed to Ohio Investments Co., LLC, an entity owned and managed by DeCoster. The write-off occurred in two separate transactions, specifically, $20.5 million on September 15, 2006 and $5 million on May 30, 2007. According to the arbitrator's award, general accounting and tax principles provide that, when an entity writes off a debt obligation on a balance sheet, such benefit must be reflected in its income statement as "gain on debt forgiveness" and consequently creates income for tax purposes.

{¶ 4} Pertaining to fiscal years ending in 2006 to 2008, OFE's accountant, Frost PLLC ("Frost"), prepared several financial statements. As is relevant here, Frost prepared an auditor's report for the Ohio Department of Agriculture related to fiscal year 2006. This report applied the Generally Accepted Accounting Principles ("GAAP") and showed the $20.5 million gain arising from debt forgiveness. Frost's auditor's report for fiscal year 2007 showed the full $25.5 million gain on debt forgiveness.

{¶ 5} In May 2008, Frost prepared the initial bonus compensation calculation. In accordance with the CMA, Frost calculated the adjusted net income, including making adjustments for depreciation and deemed interest under the bonus compensation formula. However, Frost further reduced the adjusted net income for fiscal year 2007 by the $25.5 million gain on debt forgiveness "based on management's interpretation of the agreement, " resulting in an adjusted net income for purposes of calculating bonus compensation of negative $6, 337, 375 and no bonus being due. Donald Hershey, sole owner of FEM, objected to the bonus calculation pursuant to the CMA.

{¶ 6} In March 2009, Frost prepared a second bonus calculation. This calculation for 2007 repeated the calculation set forth in the May 2008 report and again showed the exclusion of the gain on debt forgiveness and no bonus being due. Frost then offset 2008's adjusted net income with the calculated loss for 2007. This resulted in an adjusted net income for purposes of 2008 bonus compensation of negative $2.36 million and no bonus being due for 2008. Had Frost not added back the debt in 2007, the loss carryover to 2008 would have been less and, when carried forward, would have resulted in an adjusted net income for purposes of 2008 bonus compensation of over $23.1 million and a resulting bonus of over $1.15 million. Hershey again objected to the bonus calculation pursuant to the CMA.

{¶ 7} In August 2010, FEM filed a demand for arbitration in accordance with the parties' arbitration agreement. The sole claim remaining when the matter proceeded to arbitration was FEM's claim for breach of contract based on OFE's failure to pay the proper bonus for fiscal year ending in 2008 as required by the CMA. FEM argued that, in fiscal year ending in 2008, for purposes of calculating bonus compensation, OFE had an adjusted net income of $44, 834, 775, resulting in a five percent bonus of approximately $1, 156, 786. However, because OFE erroneously reduced 2008's adjusted net income by the $25.5 million gain on debt forgiveness and then further offset the erroneous loss of $47 million for fiscal year 2007 against 2008 profits, an incorrect negative adjusted net income arose for fiscal year ending in 2008.

{¶ 8} The arbitrator held that, while other agreements were executed by the parties, the CMA is the governing document for purposes of calculating bonus compensation. After a detailed discussion of the calculations, the arbitrator concluded that Frost's $25.5 million adjustments for calculating bonus compensation were not in accordance with the formula set forth in the CMA, thus creating an improper adjusted net income figure for fiscal year ending in 2007. According to the arbitrator, the proper adjusted net income for fiscal year ending in 2007 should have been $19, 162, 625 and carrying that number forward results in a 2008 adjusted net income for purposes of bonus compensation calculation in the amount of $23, 135, 724. This in turn results in a five percent bonus of $1, 156, 786.20 for fiscal year ending in 2008, plus pre-judgment interest in the amount of $177, 163.56. Because DeCoster individually and personally guaranteed all payments by OFE to FEM, the arbitrator entered the award jointly and severally against appellants.

{¶ 9} On January 4, 2012, FEM filed in the trial court an application to confirm the arbitration award pursuant to R.C. 2711.09. In response, OFE filed a motion to vacate the arbitration award arguing that the arbitrator exceeded his authority and the arbitrator's award was illogical and demonstrated a disregard for the law. After briefing, a magistrate rendered a decision finding that the arbitrator correctly applied the appropriate law. Therefore, the magistrate ...


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