True Value 2008 Annual Report Download - page 45

notes to consolidated financial statements
24 :: T RUE VALUE COMPA NY
8. COMMITMENTS AND CONTINGENCIES
True Value is involved in various claims and lawsuits incidental
to its business. The following significant matters existed at
January 3, 2009:
Active Legal Matters:
Flegles Action
On February 12, 2003, a former True Value member, Flegles Inc.
(”Flegles”), filed suit against True Value in the Circuit Court of
Carlisle County, Kentucky. On July 30, 2004, a jury found True
Value liable to Flegles for certain losses incurred by Flegles and
awarded Flegles $1,300 in compensatory damages. The jury
did not award any punitive damages. True Value filed post-trial
motions seeking to set aside the verdict or be awarded a new
trial. These motions were denied. True Value then pursued an
appeal in the Kentucky Appellate Court.
On June 2, 2006, the Kentucky Appellate Court, after having heard
arguments from both sides, reversed the judgment of the Kentucky
Trial Court which had awarded $1,300 in compensatory damages
to Flegles. Accordingly, True Value reversed its prior years’ lit-
igation reserve and recognized $650 of income in the quarter
ended July 1, 2006. On July 3, 2006, Flegles filed a motion ask-
ing the Kentucky Supreme Court to review the Appellate Court’s
reversal of the Trial Court. On February 14, 2007, the Kentucky
Supreme Court issued an Order granting Flegles’ Motion for
Discretionary Review. True Value filed its cross-motion for discre-
tionary review which was granted by the Kentucky Supreme Court
April 11, 2007. Flegles’ opening brief to the Kentucky Supreme
Court was filed June 11, 2007. True Value’s reply brief on Flegles’
appeal and its opening brief on True Value’s cross appeal were
filed August 13, 2007. Flegles’ response brief to True Value’s cross
appeal was filed on October 12, 2007, and True Value’s sur-reply
to Flegles response was filed on October 30, 2007. Oral argu-
ment was heard by the Kentucky Supreme Court on January 18,
2008. On February 19, 2009, the Kentucky Supreme Court issued
its decision which upheld the Appellate Court’s decision grant-
ing judgment in favor of True Value.
Claims Against Ernst & Young LLP
True Value pursued claims against its former outside auditors,
Ernst & Young LLP (”E&Y”), for professional malpractice, breach
of contract, deceptive business practices and fraud. True Value
contended that E&Y failed to properly discharge its duties to
True Value and failed to identify, in a timely manner, and indeed
concealed, certain material weaknesses in True Value’s internal
financial and operational controls. Hearings before the arbitra-
tion panel occurred in early 2005.
On July 28, 2005, the arbitration panel denied True Value’s claims
against E&Y in their entirety. This decision of the arbitration panel
also required True Value to reimburse E&Y for reasonable attor-
neys’ fees and expenses related to this matter. On August 17,
2005, True Value filed a motion asking the panel to reconsider its
award of attorneys’ fees and expenses. In its motion, True Value
claimed that the panel exceeded its authority when it awarded
attorneys’ fees and expenses to E&Y. On October 19, 2005, the
panel denied this motion.
On January 17, 2006, True Value filed a petition with the Circuit
Court of Cook County in Illinois (“Circuit Court”) to preserve
its rights to further challenge the panel’s authority to award
any attorneys’ fees and expenses and to vacate the final award
when it is entered.
On April 3, 2006 the arbitration panel in the E&Y matter issued
its final award. The panel ordered True Value to pay to E&Y, attor-
neys’ fees and expenses totaling $12,191 and reimbursement
of American Arbitration Association fees and expenses totaling
$384. As a result, True Value reduced its initial reserve of $18,200
that was recorded in the third quarter of 2005 based upon the
arbitration panel’s original decision, and recorded an adjustment
to prior year arbitration reserve of $5,625, in the period ended
April 1, 2006. On May 22, 2006, True Value satisfied a portion of
the judgment by paying E&Y $384.
On August 25, 2006 the Circuit Court upheld the arbitration
panel’s final award ordering True Value to pay attorneys’ fees and
expenses to E&Y. On September 28, 2006, True Value satisfied
this portion of the judgment by paying E&Y $12,191. On Octo-
ber 27, 2006, the Circuit Court ordered True Value to pay $530 in
interest to E&Y. On November 17, 2006, True Value satisfied this
final portion of the judgment by paying E&Y $530. True Value
filed an appeal with the Illinois 1st District Court of Appeals
which scheduled oral argument for the end of July, 2007. On
August 28, 2007, the District Court of Appeals reversed the judg-
ment and remanded the matter to the circuit court with directions
to remand to the arbitration panel with instructions to vacate that
portion of the award attributable to expert witness fees and to
confirm and reinstate the award in all other respects. True Value
filed a Petition for Rehearing on September 17, 2007 which was
denied on September 20, 2007. The mandate from the appel-
late court was filed November 29, 2007 returning the matter
to the circuit court as directed in the August 28, 2007 opinion.
($ in thousands)