Arbitrator’s Final Award Addresses Whether All Installment Payments Due Under Share Purchase Agreement

In Kenny v. Kenny Industries Inc., Kenny Industries was formed as a holding company for the Kenny family’s business entities. Its shareholders consisted of Gerard and siblings James, Joan, John, Patrick, and Phillip. The shareholders entered into a share purchase agreement (“SPA”), which governed the purchase and sale of Kenny Industries stock upon the death, total disability, or termination of employment with the Kenny Group of any shareholders. Any shares  transferred remain subject to the terms of the SPA.  Section 4.5 of the SPA also states: “If, at the time payments are to be made under this Agreement to the Shareholder…, the Shareholder… is indebted to any member of the Kenny Group, then [Kenny Industries], in its discretion, may withhold any payment, in whole or in part, and apply such withheld amount to the payment or partial payment of such indebtedness.”

On November 2, 1999, Gerard transferred his shares of Kenny Industries stock to a trust. In August 2005, Gerard and his sister, Mary Ann Kenny Smith, each obtained a $3.5 million loan from LaSalle Bank, N.A. for a hotel development project. In November 2005, Gerard’s employment with Kenny Industries was terminated and triggered Kenny Industries’ obligation to purchase his shares pursuant to the SPA.  A letter was sent to Gerard’s trust which valued its shares at about $5.4 million. It informed the trust that it intended to exercise its right to set off a $7.6 million debt it claimed Gerard owed. As a result of the set-off, Kenny Industries claimed it owed nothing to Gerard.

The trust initiated arbitration proceedings to dispute Kenny Industries’ valuation of the shares and challenged the set-off. The arbitrator issued an interim award which valued the trust’s shares at $6,989,626. The arbitrator concluded that Kenny Industries must pay that amount to the trust; and for the $7.6 million set-off claimed by Kenny Industries, the arbitrator ruled that it had no right to exercise its set-off option because the debt owed under the agreement was to the siblings, individually. A final award was issued on March 25, 2009, for $2,253,041.58.

The trust filed a petition in which it sought confirmation of the final award and entry of judgment. On November 3, 2009, it filed a motion for summary judgment on its petition. Kenny Industries filed a response in which it asked for a stay of enforcement pending the resolution of a separate case filed in 2005 (“2005 case”) involving Gerard and his siblings.

The court reviewed whether an arbitrator’s final award addressed all installment payments due under the SPA; whether the merger doctrine precluded the holding company’s enforcement of its contractual right of set-off against payment due; and whether sibling shareholders’ assignment of their judgment to the holding company created a debt owed to holding company so as to allow for a set-off of judgment.

Kenny Industries claimed that the award did not address future installment payments. The court determined that Kenny Industries’ argument is without merit. The arbitrator’s final award makes clear it contemplated future installment payments as well as the payments due as of the date of judgment.

The trust disputed that Kenny Industries is entitled to a set-off, and argues that the merger doctrine bars Kenny Industries from doing so. The merger doctrine states that once a party obtains a judgment based upon a contract, the contract is entirely merged into the judgment. Therefore, the trust contends that “the SPA [and its set-off provision can] no longer be invoked as a defense to Industries’ enforcement of the Trust’s Judgment.” Kenny Industries did not attempt to attack the underlying judgment rather sought to enforce its contractual right of set-off against “any payment” due to the trust under the SPA. The merger doctrine is inapplicable.

Kenny Industries may exercise its right to set-off pursuant to the SPA if the assignment created a debt owed by Gerard to Kenny Industries. An assignment operates to transfer to the assignee all the right, title, or interest of the assignor in the thing assigned. However, the assignee cannot, merely by virtue of the assignment, acquire a greater right or interest than the assignor possessed. It is clear under the SPA, that a debt owed to the Kenny siblings does not qualify as an indebtedness to Kenny Industries that may be set off.  Since the Kenny siblings had no right to set off their 2005 case judgment, they could not properly assign that right to Kenny Industries.

The court held that the arbitrator’s final award addressed all installment payments due under SPA; the merger doctrine did not preclude the holding company from commencing litigation against trust to enforce its contractual right of set-off; and sibling shareholders’ assignment of their judgment to holding company did not create a debt owed to holding company.

Kenny v. Kenny Industries Inc., 976 N.E.2d 1040 (Ill.App. 1st Dist. 2012).