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Warren Buffet loses to Oscar Violago

(Article published in the Apr 14, 2010 issue of Manila Standard Today)  

The “Final Order of Judgment” was issued by District Judge Gary B. Randall on 02 April 2010. The losing party’s lawyers, Kutak Rock LLP, ranked by the National Law Journal as the largest law firm in Omaha, Nebraska, claimed, as expected, that they “were shocked and disappointed.” Just as expected, the winning party’s lawyer, James Kennedy, construed the decision as “a warning to corporations that they cannot run roughshod over minority shareholders.”

What was not expected was MidAmerican Energy Holdings Company (“MidAmerican”), a holding company controlled by Warren Buffett’s Berkshire Hathaway, Inc., and its wholly-owned subsidiary CE Casecnan, Ltd., losing to Oscar I. Violago and his majority-owned San Lorenzo Ruiz Builders and Developers Group, Inc. (“San Lorenzo Ruiz”) in the case brought by the American plaintiffs against the Filipino defendants in the District Court of Douglas County, sitting in Buffet’s own home court in Omaha, Nebraska, United States of America.

Sometime in 1993, Oscar Violago, my batchmate at the Ateneo College of Arts and Sciences, Class of 1964, decided to respond to then President Fidel V. Ramos’ call for private investors to develop and implement an irrigation project in Casecnan, Nueva Ecija.  Nueva Ecija was to Violago what Omaha was to Buffet—the place whence they came.  By the end of that year, Violago, together with his co-investors, including LaPraire Group Contractors (International), Inc. (“LPG”) had enough in concept and other wherewithal to bring their project to the attention of California Energy Company, Inc. (“CalEnergy”), the predecessor of MidAmerican.
 










     

Spring of the following year saw San Lorenzo Ruiz entering into a Memorandum of Understanding (“MOU”) with a MidAmerican subsidiary and LPG for the formation of a project company.  The equity of project company, as agreed, was owned 35% by MidAmerican’s designee and 15% by San Lorenzo Ruiz, with the remaining 50% by other parties, including 15% for LPG.  The shares of San Lorenzo Ruiz and of LPG, were, however, subject to a downward adjustment (in favor of CalEnergy) based on an internal rate of return as shown pro forma financial projections on the project.

In 1998, San Lorenzo Ruiz sold its interests in all but 74 of its 111,074 shares in the project company.  However, San Lorenzo Ruiz retained the option to buy its shares back by repaying the selling price plus interest.  LPG, on the other hand, retained its interest in the project company.

On December 11, 2001, the project started operations and soon San Lorenzo Ruiz wanted to exercise its option to buy its shares back.  In February of the following year, MidAmerican calculated San Lorenzo Ruiz’s interests in the project and arrived at the conclusion, through some financial alchemy, that San Lorenzo Ruiz had by then no more interest left and therefore had nothing to buy back. 

LPG, which was, as earlier stated, like San Lorenzo Ruiz vulnerable to the downward adjustment of its interest in the project company, ran to San Francisco Superior Court, claiming that MidAmerican had deliberately manipulated the calculation of the minorities’ interest and claimed its 15% remained intact based on actual project economics. The California court agreed; MidAmerican appealed, but lost its appeal.  Emboldened by the judicial determination that MidAmerican had miscalculated LPG’s interest, San Lorenzo Ruiz wrote a letter to MidAmerican exercising its right to buy back.

MidAmerican’s response was to jump the gun on San Lorenzo Ruiz by filing a suit in its own hometown, throwing against Violago all and every legal point it could muster (including the proverbial kitchen sink) arguing that San Lorenzo Ruiz had neither right nor anything to buy back.  San Lorenzo Ruiz, for its part, insisted on specific performance, claiming the principle of pacta sunt servanda, which requires, roughly, that parties keep their word as stated in their agreements.

The court conducted a jury trial from March 1 to March 12, 2010, and, ruling on both parties’ motions for directed verdict, announced that he would rule on those motions in a manner that would be dispositive of the case and accordingly issue a final order of judgment.  Such a course of action by a judge, under American law, is justified when the “facts are…such that reasonable minds can draw only one conclusion therefrom.”  In such a case, the matter need not be deliberated upon by the members of jury, who, after all, were chosen because they had reasonable minds.

The Omaha court, concurring with the finding of the California court in the case brought by LPG, found that MidAmerican, in calculating the amount interest of San Lorenzo Ruiz in the project, wrongfully and contrary to the agreement of the parties did not use information that reflected “actual project economics”.  Such miscalculation was done by MidAmerican knowingly, deliberately and with the intention, precisely, to reduce San Lorenzo Ruiz’s interest to zero and thereby prevent San Lorenzo Ruiz from exercising its rightful option to buy back its shares in the project company.  Figures don’t lie, but you-know-who can figure.

In a later piece, I will deal with the detailed and involved argumentation used by the lawyers of both parties to push the interests of their respective clients. 

Suffice it to say for now that the Omaha decision, like California decision, affirms that Lady Justice in America remains symbolically blindfolded in her majesty.

At least in this one case, Lady Justice was no respecter of persons and was unafraid to decide with neither fear nor favor. All that mattered to her was the true balancing of the scales; justicia fiat, caelum ruat, she seemed to say, that day Violago brought down the sky in the city of Buffet.
 

     

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