This motion (seq. no. 1) requires the court to determine whether an alternative dispute resolution (ADR) mechanism in a merger agreement precludes plaintiff from bringing indemnification claims for essentially mirror-image relief in this court. Because the parties wrote the agreement to provide for only limited ADR, and because the agreement anticipates claims for indemnification and breach of warranty, I hold that plaintiffs' indemnification claims are appropriate before this court.

The following facts are primarily from the complaint and from other documentation on this motion to dismiss.

The Parties

Plaintiff Lincoln Snacks Holding Company ("Buyer" or "plaintiff") is a Delaware corporation with a principal place of business in Chicago, Illinois. Defendant Brynwood Partners III L.P. ("Brynwood Partners") is a Delaware limited partnership with a principal place of business in Greenwich Connecticut. Defendant Brynwood Management L.P ("Brynwood Management") is also a Delaware Limited Partnership with a principal place of business in Greenwich, Connecticut. Brynwood Management is the general partner of Brynwood Partners. Individual defendants Hendrik J. Hartong, Jr. ("Mr Hartong Jr."), Hendrik J. Hartong, III ("Mr [*2]Hartong III"), David D. Clarke ("Mr. Clarke"), James R. Gerbo ("Mr. Gerbo") and Joanne W. Prier ("Ms. Prier") are all citizens of Connecticut. Individual defendant John T. Gray claims to be a citizen of Ohio.

Mr. Hartong Jr. and Mr. Gray are general partners of Brynwood Mangement and used to be on the Board of Directors of Lincoln Snacks Company (the "Company"), a leading producer of premium caramelized pre-popped popcorn. The Company's primary product lines utilize the brand names "Poppycock", "Just the Nuts!" "Fiddle Faddle" and "Screaming Yellow Zonkers." Manufacturing takes place in the Company's Lincoln, Nebraska plant. Mr Hartong III is the former President and Chief Executive Office of the Company. Mr. Clarke was an officer of the Company and served as the Executive Vice President of Sales. Mr. Gerbo was the Vice President of Marketing for the Company. Ms. Prier was the Chief Financial Officer for the Company.

The Merger

Brynwood Partners used to be the sole shareholder of the Company. In the Fall of 2003, Willis Stein & Partners III L.P. ("Willis Stein III"), a private equity firm expressed an interest in acquiring the Company. Willis Stein III and Buyer's predecessors conducted detailed due diligence of the Company that included review of the Company's financial documents.

Brynwood Partners, the Company and plaintiffs' predecessors, WS Brands, Inc, WS Brands Merger Sub, Inc., entered into an agreement for the sale of the Company dated as of January 30, 2004 (the "Merger Agreement"). At the time, the parties did not agree to a specific dollar amount for the Company, but instead tied the purchase price to the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA) for calendar year (CY) 2003. The parties had yet to determine that number. Plaintiff alleges that defendants, aware that the purchase price was tied to EBITDA for CY2003, artificially inflated that number by, among other things: (1) "stuffing" certain of the Company's largest customers with excess inventory; (2) defaulting on material contracts with its three largest customers and (3) failing to "lay in supplies of a key ingredient at advantageous prices in the ordinary course of business and consistent with the Company's past practices." (Complaint ¶ 26). Plaintiff complains that these activities caused it to pay $20 million more than the Company was actually worth.

The Cash Amount and Subsequent Adjustments

On February 10, 2004, Brynwood prepared and delivered to plaintiff the Estimated Closing Working Capital and Estimated Closing Indebtness with supporting documents. On February 27, 2004, the closing for the sale of the Company took place. The cash component (the "Cash Amount") of the merger consideration that plaintiff paid to Brynwood Partners was $98,738.731.00. This amount was equal to seven times EBITDA for the twelve-month period ending December 27, 2003. (See Merger Agreement § 1.6[a]). In March 2004, Brynwood delivered to plaintiff the Company's balance sheet as of February 27, 2004 and income statements for the eight-month period ending February 27, 2004 that it prepared after the Company's books had closed. ("Interim Financial Statements")

In section 8.1, the Merger Agreement provided for positive and negative adjustments to the Cash Amount, including post-closing revisions to the Company's assets and liabilities as follows:

( c ) Working Capital Adjustment

( i) As promptly as practicable following the Closing Date, but in no event later than ninety (90) days thereafter. . .[Buyer] shall cause to be prepared and delivered to [Brynwood] the audited balance sheet of the Company as at the Closing Date. . .(the "Closing Balance Sheet") and (A) a statement derived from the Closing Balance Sheet setting forth the Working Capital (as defined herein) as at the Closing Date (the "Closing Working Capital") and (B) a statement of Indebtness of the Company at the Effective Time (the "Closing Indebtness").

According to section 1.8 (d), Brynwood would then have 30 days from its receipt of that Closing Balance Sheet and related statements to dispute "the calculation of the Closing Working Capital or Closing Indebtness, or any element of the Closing Balance Sheet relevant thereto by providing written notice to [plaintiff] of such dispute. . ." (Id. § 1.8 [d]). If the parties were unable to resolve the "disputed matters" among themselves, they were to submit their dispute to either KPMG or other "nationally recognized independent accounting firm. . .for final resolution in accordance with the terms and provisions of this Agreement." (Id.) The determination of the Independent Auditor Determination was to be "final and binding upon the parties hereto and shall be limited to Disputed Matters." (Id.)

Pursuant to § 1.8 ( c ), plaintiff undertook its review of the Closing Balance Sheet using Ernst & Young LLP ("E&Y") as its outside accountants. On May 26, 2004, based on E&Y's audit of the Company's books and records, plaintiff delivered to Brynwood the statement of Closing Working Capital and the statement of Closing Indebtness, as well as a report that E&Y wrote, dated May 21, 2004, that contained the audited Closing Balance Sheet. (Affidavit of Kevin D. Bandoian, sworn to January 7, 2005 ("Bandoian Aff." Ex. 4). The E&Y report states that "[i]n our opinion, the accompanying [Closing Balance Sheet], presents fairly, in all material respects, the information set forth therein. . ." (Id.) Based on E&Y's work, plaintiff sought a minor reduction of just $511,676.00 to the purchase price. Defendants contend that under the express terms of the Agreement, the opportunity for plaintiff to raise adjustment claims expired when it delivered these documents to Brynwood on May 26, 2004. (Mem. At 11).

On July 9, 2004, in compliance with Section 1.8(d) of the Agreement, Byrnwood delivered to plaintiff a Working Capital Dispute Notice disputing numerous aspects of the statement of Closing Working Capital and sought an adjustment increase in its favor of $1,233,469. (Bandoian Aff. Ex. 6). Among the disputed matters that Brynwood contested were plaintiff's improper adjustments to the Closing Balance Sheet relating to:

the way the Company recognized revenue from the sales of product it sold to Wal-Mart and Target;

The Company's recognition of a refund receivable from its worker's compensation insurer; [*4]

the Company's reserves for accrued liabilities for slotting and promotional accruals;

the Company's reserves for accrued liabilities for advertising and excess inventory;

the Company's allowance for doubtful accounts; and

the Company's allowance for return of product from Winn-Dixie.

(Id. ) Plaintiff and Brynwood were unable to resolve most of these areas of dispute and as of the date of this motion's submission were in the process of engaging Deloitte & Touche LLP to serve as the Independent Auditor in accordance with section 1.8(d) of the Merger Agreement.

Indemnification Provisions

In section 8.2 of the Merger Agreement, Brynwood agreed to:

"indemnify . . .[Lincoln] for any and all losses, damages, expenses (including without limitation court costs, amounts paid in settlement, judgments, reasonable attorneys fees, or other expenses, including without limitation, those arising out of the enforcement of this agreement) suits, actions, claims, deficiencies, liabilities, diminution in value, taxes or obligations, subject to the limitations of Section 8.4 (collectively Losses). . . . . . caused by. . .any misrepresentation or breach of any representation or warranty of the Company or Brynwood. . ."

Section 8.4 limited Brynwood's liability for Losses "with respect to the subject matter of this Agreement and the transactions contemplated hereby is, and shall be limited to, an aggregate amount equal to $10,000,000" (the "Cap"). However, certain indemnified claims were not subject to the Cap such as Losses from "any misrepresentation of which the Company or any Shareholder had actual knowledge prior to the Closing." (Id. § 8.4(b)(vi) , ( c )).

Section 8.7 entitled "Notice of Claims" required written notice setting forth "in reasonable detail the basis of such claim for indemnification." The party against whom such claims were asserted (the "indemnifying party") then had 30 days to dispute the claims set forth in this "Indemnification Notice" by setting forth in writing "in reasonable detail the basis of such dispute." (Id. § 8.7). If the parties were unable to resolve the dispute within 30 days following service of that notice of dispute, the parties could then pursue all legal remedies. (Id. § 8.9).

On September 28, 2004, plaintiff served Brynwood with its Indemnification Notice. The Indemnification Notice stated that after the closing "a number of troubling issues have come to Buyer's attention." (Bandoian Aff. Ex. 7). The notice goes on to accuse Brynwood of, inter alia, misrepresenting its performance, breaching warranties it made in the Merger Agreement and of knowing of these misrepresentations and breaches before February 27, 2004, the date of the Closing. In particular, the notice described that the Company: (1) "wrongly booked certain revenue and income;" (2) "stuffed certain customers with excess inventory"; (3) failed to accrue [*5]or wrongly accrued for certain liabilities and expenses; and (4) improperly reserved for certain loss contingencies. (Id.)

On October 27, 2004, Brynwood served a Dispute Notice contesting all of plaintiff's indemnification claims. (Bandoian Aff. Ex. 8). On November 18, 2004, plaintiff commenced this action. Counts one through nine of the complaint are against defendants Brynwood Partners, Brynwood Management, Mr. Hartong Jr., and Mr. Gray. These counts assert claims for indemnification for various breaches of representations and warranties that Brynwood Partners made in the Agreement. Count ten is for fraud that plaintiff asserts against Brynwood Management, Mr. Hartong Jr., and Mr. Hartong III. Count eleven is also for fraud against Mr. Hartong III, Mr Clarke, Mr Gerbo and Ms. Prier as former officers of the Company.

This Motion

Defendants have moved to dismiss all claims against all defendants except for Count nine against Brynwood Partners. Count nine is one of the indemnification claims and relates to the Company's alleged purchase of butter. Defendants agree that this claim is not dismissable at this juncture. (Def. Mem at 22).

Defendants contend that section 1.8(c) (I) required plaintiff to raise all disputes that would impact the Closing Working Capital at the time it tendered its audited closing balance sheet. Defendants further contend that plaintiff has disguised as indemnification claims what really are post-closing adjustments that plaintiff either did or should have raised within the confines of section 1.8's ADR provision for adjustment to the Merger Consideration. For example, defendants point to Count I of the complaint where plaintiff alleges that "[i]n violation of GAAP and the Company's representations and warranties, the Company wrongly booked in CY2003 approximately $ 2.8 million of revenue from the sales of a 20-ounce Just-the-Nuts ("JTN") product to Wal-Mart." (Coll Aff. Ex A). Plaintiff also addressed this issue in its Indemnification Notice. (See Bandoian Aff. Ex. 7, Exhibit 1.I ¶¶ 11-15).

Defendants speculate that this allegedly wrongful booking to Wal-Mart concerns the exact same issue that plaintiff has already raised as an adjustment to the Closing Balance Sheet to which Brynwood specifically objected. Defendant supports this speculation pointing out that the claim and adjustment both involve the same product, the same packaging, the same year of sale, the same revenue records and that the sales occurred during the same time period.

However, as plaintiff explains in the affidavit of Loius G. Dudney, sworn to February 11, 2005, ("Dudney Aff") this claim embodies a GAAP violation because "GAAP does not permit a sale to be recorded when the customer has an explicit right to return the product."

Likewise, Count II of the Complaint alleges that Brynwood breached the Merger Agreement and GAAP by "booking in CY2003 an anticipated refund from a workers' compensation insurer." (Coll Aff. Ex A ¶ 54). Plaintiff had also raised this issue in its indemnification notice. (Bandoain Aff. Ex 7, Exhibit 1 ¶¶ 27-28). Defendant speculates that plaintiff raised this same issue in its audited Closing Balance Sheet because the transaction and the amounts claimed are identical. (Bandoian Aff. ¶ 39). However, as explained at ¶ 34 of the Dudney Aff., "GAAP does not permit the recording of a contingent gain." Therefore, according to plaintiff, Count II asserts a GAAP violation and therefore a breach of the warranty that the [*6]financial statements complied with GAAP.

This case is remarkably similar to the Court of Appeals decision in 2003 entitled In the Matter of Westmoreland Coal Company, 100 NY2d 352. In Westmoreland, the Westmoreland Coal Company had acquired several subsidiaries of Entech, Inc. ("Entech"). Entech had represented and warranted in the stock purchase agreement that its interim financial statements "were prepared in accordance with GAAP." (Id. at 354).

The stock purchase agreement also contained a separate post-closing purchase price adjustment provision whereby the parties were to adjust the purchase price based on the asset values of various Entech coal-mining subsidiaries on the closing date. As in the Merger Agreement before this court, the parties were to refer disputes concerning the post-closing purchase price to a "nationally recognized independent accountant" to determine the purchase price adjustment. (Id. at 356) The accountant's determination was final and binding upon the parties. (Id).

Like the Buyer in this case, Entech delivered to Westmoreland a certificate detailing its calculations concerning the purchase price adjustment. Westmoreland disagreed with the calculations because it believed that certain asset valuations did not comply with GAAP. Westmoreland then took the position that the parties had to submit the entire dispute to the independent accountant for a purchase price adjustment that would bind the parties.

Entech argued that because the asset values on Entech's certificate were consistent with the financial statements the stock purchase agreement referred to and because the stock purchase agreement contained Entech's representation and warranty that it had prepared those financial statements in accordance with GAAP, Westmoreland had to claim breach of that representation and warranty in a court of law.

In an unanimous opinion, the Court of Appeals agreed, holding that Westmoreland's valuation objections should proceed under the indemnification provisions and not under the purchase price adjustment provisions. In reaching this decision, the Court took several aspects of the parties' agreement into account. The Court read the agreement in Westmoreland "as a harmonious and integrated whole" to conclude "that Westmoreland's objections related to accounting conventions, estimates, assumptions or asset values common to both the interim financial statements and the closing date certificate unambiguously fall within the Agreement's indemnification provisions, not its purchase adjustment provisions." (Id. at 358). The Court noted:

"[t]he Agreement's indemnification provisions afford a complete, comprehensive remedy for any and all claims for breach of a representation or warranty. The indemnification provisions further set out a detailed method for asserting claims for breach of a representation or warranty and require that, if negotiations fail, these claims are to be resolved exclusively by litigation."

The Court then held that Westmoreland's objection to the asset value on the closing certificate for failure to apply GAAP consistently was an assertion of a breach of a representation or warranty that the parties had to resolve in court. (Id.) A different result, the court reasoned, "would subvert this 'exclusive remedies' limitation and waiver." (Id.) [*7]

The Court also reasoned that to hold otherwise would also subvert the Agreement's due diligence provisions. (Id. at 359). Westmoreland had negotiated for the representation and warranty from Entech that the financial statements complied with GAAP. Westmoreland could have raised concerns it had about Entech's accounting practices during the due diligence process and addressed them in the purchase price adjustment provisions, but did not. The parties extensively negotiated the indemnification provisions with specific attention to the amount of post-closing liability for breaches of warranties. Therefore, the appropriate venue to address these breaches was the court, as the agreement dictated.

The Court of Appeals took particular note of the narrowness of the ADR provision. The purchase price adjustment provision in that contract had required Entech to prepare the certificate on a basis consistent with the financial statements to which the stock purchase agreement referred. Entech was supposed to apply the same methodology to ensure consistency with the numbers. Whatever methodology Entech employed had to comply with GAAP. (Id. at 358). The Court reasoned that the purpose of using consistent methodology was to "flag changes in value occurring as a result of the Companies' operations between...the date of acquisition . . .and the closing date." (Id. at 360). Thus, the ADR provision in Westmoreland was designed to determine interim changes during a limited time period. (Id.)

Westmoreland is directly applicable to this case. As with the ADR provision before the Court of Appeals, section 1.8's ADR provision in the Merger Agreement is narrow. Section 1.8(d) only applies to disputes about "the calculation of the Closing Working Capital or Closing Indebtness, or any element of the Closing Balance Sheet relevant thereto. . ." In addition, section 9.4 states that "[a]pplication of Section 1.8 shall not prevent or mitigate the rights of any party to bring any other claim for indemnification." Therefore, the Merger Agreement specifically anticipated claims for indemnification outside of section 1.8. There is no limitation anywhere in the Merger Agreement that a Working Capital Adjustment claim making its way through the accountant review process somehow precludes a party from bringing an indemnification claim in court even though the indemnification claim and the claim in ADR might overlap in part.

Defendants point to the narrowness of the provision in Westmoreland that applied to disputes concerning changes between the interim financial statements and the closing date certificate. However, the Court did not qualify its opinion when it held that, under that agreement, the exclusive method to resolve claims for breach of representation or warranty was through litigation rather than the purchase price adjustment provision.

Here, the principal is the same. The parties drafted the Merger Agreement to resolve claims for breach of warranty and misrepresentation via litigation. Plaintiff's claims are for breach of warranty and misrepresentation. Thus, according to Westmoreland, this court is constrained to entertain these claims even though the same or part of the same claim is underway before the independent accountant. This is the net effect of how the parties worded their agreement.

Defendants' concern that there might be duplication of the damages award between plaintiff's working capital claims and its indemnification claims is unfounded. Courts deal with competing litigation all the time. Recovery in one lawsuit can be offset against the other. Two fora is exactly what the Merger Agreement contemplated by giving Brynwood the right to dispute plaintiff's calculation of the Closing Working Capital. [*8]

However, the court notes that the process that is presently underway before the independent accountant would greatly assist in narrowing the disputes before this court and would avoid some duplication of effort on the part of the parties. (See Cohen v. ARK Asset Holdings, Inc., 268 AD2d 285, 286). Therefore, the court grants defendants' request to stay this action, with the exception of Count nine, pending completion of the independent accountant review process. A stay would also allay defendants' concerns about duplicative effort and recovery. No stay of count nine is appropriate because, as defendants have concurred, it would not be part of the independent accountant's determination.

II.Personal Jurisdiction

Defendants have moved to dismiss for lack of personal jurisdiction all of plaintiff's claims against Brynwood Management, Mr, Hartong Jr., Mr Hartong III, Mr. Clarke, Mr. Gerbo and Ms. Prier. Plaintiff sued Brynwood Partners because it consented to the exclusive jurisdiction of this Court. Plaintiff claims it additionally has jurisdiction over Brynwood Management because it is the general partner of Brynwood Partners and over Mr. Hartong Jr. and Mr. Gray by virtue of their being general partners of Brynwood Management even though Brynwood Partners is a limited partnership. Unlike the relationship between general partners, the relationship of general partner to limited partner does not confer long-arm jurisdiction, (see Friedson v. Lesnick, 1992 WL 551543 [SDNY 1992]), much less jurisdiction where the only basis is because the limited partner signed an agreement consenting to the exclusive jurisdiction of this court.

Plaintiff's other bases for asserting personal jurisdiction are without merit. Plaintiff contends that it also has jurisdiction over Brynwood Management, Mr, Hartong Jr., Mr Hartong III, Mr. Clarke, Mr. Gerbo and Ms. Prier because they "actively participated in and [were] closely related to the transaction." However, there is nothing in the Complaint or the motion papers to indicate these activities had a tie to New York. That the Agreement may mention some of the other defendants is of no moment as none of these defendants actually signed the Agreement consenting to jurisdiction. Finally, that some of the individual defendants may "reside only a short distance" from New York does not convey jurisdiction. Accordingly, defendants' motion to dismiss the Complaint for lack of personal jurisdiction is granted as to all defendants other than Brynwood Partners. However, plaintiff's request for permission to replead against these defendants to assert additional grounds for jurisdiction is granted. (See CPLR 3025[b]; Murray v. City of New York, 43 NY2d 400 [courts should freely grant leave to amend]).

Because this court finds that it lacks personal jurisdiction over defendants Brynwood Management, Mr, Hartong Jr., Mr Hartong III, Mr. Clarke, Mr. Gerbo and Ms. Prier, there is no need to reach the issue of whether plaintiff has properly pled fraud asserted only against them.

Accordingly, it is

ORDERED THAT defendants Brynwood Management, Mr, Hartong Jr., Mr Hartong III, Mr. Clarke, Mr. Gerbo and Ms. Prier's motion to dismiss is granted and the complaint is dismissed as to these defendants with leave to replead; and it is further

ORDERED THAT the County Clerk is directed to mark the records with the dismissal and sever and continue the remainder of the action against defendant Brynwood Partners; and it is further

ORDERED THAT remaining defendant Brynwood Partners is directed to answer the Complaint within ten days from the date of service of this order with notice of entry; and it is [*9]further

ORDERED THAT with the exception of Count Nine of the Complaint., the action is stayed as to defendant Brynwood Partners; and it is further

ORDERED THAT the remaining parties are directed to appear for a preliminary conference on September 22, 2005 at 10 a.m., in the courtroom, room 248, 60 Centre Street.

Dated: July 13, 2005_______________________________

J.S.C.