Martin O. EVANS, Plaintiff and Appellant, v. Craig C. NIELSEN, Defendant and Appellee.
No. 20130770-CA
Court of Appeals of Utah
March 19, 2015
2015 UT App 65
Mary Anne Q. Wood, Stephen Q. Wood, and Jared M. Asbury, Salt Lake City, Attorneys for Appellee.
Judge STEPHEN L. ROTH authored this Opinion, in which Judges J. FREDERIC VOROS JR. and MICHELE M. CHRISTIANSEN concurred.
Opinion
ROTH, Judge:
¶1 Martin O. Evans appeals the district court‘s confirmation of the final award of an arbitrator. Evans argues that we should reverse the district court‘s confirmation and direct the district court to vacate the arbitrator‘s award on the grounds that the arbitrator exceeded his authority and refused to hear relevant evidence. We affirm.
BACKGROUND
¶2 This case is premised on a promissory note containing an arbitration agreement. In 2005, Evans and Craig C. Nielsen purchased a number of H & R Block franchises in Idaho and formed several limited liability companies (the Tax Companies). Because Evans lacked the money to fund his portion of the purchase, Nielsen advanced $500,000 with the understanding that Evans would eventually repay Nielsen $256,000 plus interest and make up the balance with “sweat equity” by working for the business. The two men agreed that Evans would own 49% of the Tax Companies and Nielsen would own 51%. This parties formalized the agreement in a promissory note (the Note) signed in October 2005. The Note had a maturity date of October 30, 2006. The Note also provided Nielsen a “right of setoff in all [Evans‘s] ownership interests in all business ventures, including but not limited to, any interest in
[Evans] authorizes [Nielsen], to the extent permitted by applicable law, to charge or setoff all sums owing on the debt against any and all such interests, and, at [Nielsen]‘s option, to file in court to foreclos[e] such interests to allow [Nielsen] to protect [Nielsen]‘s charge and setoff rights provided in this paragraph.
¶3 Nielsen asserts that over the next several years Evans took more than $200,000 in unauthorized compensation from the Tax Companies and that Evans‘s poor investment choices saddled the Tax Companies with more than $740,000 in uncollectible receivables. In April 2010, out of growing concern for the future of the business, Nielsen took steps to terminate his business relationship with Evans. According to Evans, Nielsen changed the locks on the filing cabinets and blocked Evans‘s access to the Tax Companies’ books and records while Evans was out of town. Shortly thereafter, Evans and Nielsen were both in attendance as the sole members of the Tax Companies at an annual membership meeting. Nielsen declared the Note in default and that, as a consequence, he had “strictly foreclosed” on all of Evans‘s membership interests in the Tax Companies, the value of which, Nielsen asserted, was equal to the remaining amount due on Evans‘s Note. This left Nielsen as the sole member and owner of the Tax Companies.
¶4 Evans filed suit against Nielsen seeking a declaration that Nielsen‘s seizure of his interests was ineffective and void, as well as preliminary injunctive relief. The matter was eventually referred to arbitration. At arbitration, one of the main disputes between the parties was whether the Setoff Provision in the Note established a true right of setoff or had actually created a security interest requiring foreclosure. This distinction mattered to the parties because the foreclosure of security interests is governed by Utah‘s Uniform Commercial Code (the UCC) while a “right of recoupment or set-off” is not. See
¶5 In an October 2011 interim ruling addressing motions from both sides, the arbitrator concluded that Evans was in default on the Note. The arbitrator then determined that the Note‘s Setoff Provision was enforceable on two independent alternative grounds. First, the arbitrator ruled that the Setoff Provision in the Note meant that the “UCC expressly is not applicable to the Parties’ Note.” In the alternative, however, he ruled that even “[i]f the UCC were to apply” and even if Evans was correct that Nielsen had failed to conduct a proper foreclosure sale, Evans could not simply recover his interest in the Tax Companies. Instead, the arbitrator determined that subsection 625(4) of the UCC limited Evans‘s recovery to any proceeds in excess of the balance of the Note that would have been realized had the foreclosure been properly conducted. The arbitrator then concluded that, under either the “setoff” or the UCC scenarios, the only “issue left to be decided under the Note is whether the value of [Evans‘s] Interest in the Tax Companies on April 10, 2010, exceeded the amount of his Debt on the Note at that time and, therefore, whether there was a surplus ... to which he is entitled.”
¶6 Evans submitted a “Request for Clarification,” asking the arbitrator to reconsider his ruling that Evans was in default on the Note. Evans argued that neither party had raised default as an issue to be considered in the motions they presented to the arbitrator. Evans maintains that he himself had only assumed the Note was in default for purposes of his motion, which addressed other
ISSUES AND STANDARDS OF REVIEW
¶7 Evans advances two bases for his contention that the district court erred in confirming the arbitrator‘s award: (1) the arbitrator exceeded his authority in determining that the UCC did not apply to the Note, and (2) the arbitrator refused to hear relevant evidence related to the issue of default. Two standards of review govern here. First, “[t]he standard of review for a trial court is an extremely narrow one giving considerable leeway to the arbitrator, and setting aside the arbitrator‘s decision only in certain narrow circumstances.” Softsolutions, Inc. v. Brigham Young Univ., 2000 UT 46, ¶ 10, 1 P.3d 1095 (citation and internal quotation marks omitted). “The trial court may not substitute its judgment for that of the arbitrator, nor may it modify or vacate an award because it disagrees with the arbitrator‘s assessment.” Id. (citation and internal quotation marks omitted); see also Buzas Baseball, Inc. v. Salt Lake Trappers, Inc., 925 P.2d 941, 947 (Utah 1996) (“[J]udicial review of arbitration awards should not be pervasive in scope,” and should be affirmed “as long as the proceeding was fair and honest and the substantial rights of the parties were respected.” (alteration in original) (citation and internal quotation marks omitted)). Second, on appeal, “[t]here is no special standard governing [an appellate court‘s] review of a district court‘s decision to confirm, vacate or modify an arbitration award.” Buzas, 925 P.2d at 948 (emphasis and second alteration in original) (citations and internal quotation marks omitted). “Thus, in reviewing the order of a trial court confirming, vacating, or modifying an arbitration award, we grant no deference to the district court‘s conclusions [of law] but review them for correctness, and we review the district court‘s factual findings under a clearly erroneous standard.” Id. (alteration in original) (citations and internal quotation marks omitted).
ANALYSIS
I. The Arbitrator Did Not Exceed His Authority.
¶8 Evans first argues that the district court should have vacated the arbitration award because the arbitrator exceeded his authority. See
¶9 Evans also argues that the arbitrator exceeded his authority by “manifestly disregard[ing] the law” in determining that the UCC did not apply. “Manifest disregard of the law is a judicially created doctrine stemming from the exceeding authority statutory ground.”2 Buzas Baseball, Inc. v. Salt Lake Trappers, Inc., 925 P.2d 941, 951 (Utah 1996); accord Pacific Dev., L.C. v. Orton (Pacific I), 1999 UT App 217, ¶ 14, 982 P.2d 94, aff‘d in part, rev‘d in part, (Pacific II) 2001 UT 36, 23 P.3d 1035. This doctrine requires more than “mere error as to the law.” Buzas, 925 P.2d at 951. In this respect, our supreme court has articulated that “[t]he error must have been obvious and capable of being readily and instantly per-
ceived by the average person qualified to serve as an arbitrator.” Id. (citation and internal quotation marks omitted). Additionally, “the term ‘disregard’ implies that the arbitrator appreciates the existence of a clearly governing legal principle but decides to ignore or pay no attention to it.” Id. (citation and internal quotation marks omitted).
¶10 In support of his arguments that the arbitrator exceeded his authority by deciding that Nielsen‘s seizure of Evans‘s interests in the Tax Companies constituted an allowable setoff under the Note‘s Setoff Provision, Evans contends that “[s]etoff only works to cancel out mutual debts through disposition of the creditor‘s obligation to the debtor, while a security interest gives a creditor the right to seize a debtor‘s assets to satisfy a debt.” He also argues the distinction between setoff and foreclosure is obvious and cites National City Bank, Northwest v. Columbian Mutual Life Insurance Co., 282 F.3d 407 (6th Cir. 2002), which states, “Of course the right of set-off is not a security interest and has never been confused with one: the [UCC] might as appropriately exclude fan dancing.” Id. at 410 (citation and internal quotation marks omitted). Evans therefore argues that Nielsen‘s seizure of his ownership in the company was clearly a foreclosure in substance, even if it was undertaken in the form of a “setoff” under the Note. Thus, he contends, the arbitrator‘s determination that Nielsen‘s action was a setoff and that the UCC did not apply was irrational and manifestly disregarded the law.
¶11 But our role is not to review the arbitrator‘s award for legal error. See Buzas, 925 P.2d at 948. Instead, our only task is to decide whether the district court erred in determining that the arbitrator did not exceed his authority and in ultimately confirming the arbitration award. See id. In
¶12 In its ruling, the district court first determined that it could only find that the arbitrator had exceeded his authority if the award “is ‘without foundation in reason or fact’ [or] is based on a ‘manifest disregard of the law.‘” (Quoting Buzas, 925 P.2d at 941, 950-51.) And the court recognized that the scope of its review of the award was constrained; that is, the district court was “not to determine whether the UCC should or should not apply, only to determine whether there is a rational basis to not apply the UCC.” See Softsolutions, 2000 UT 46, ¶ 10. The court then noted that “a setoff is a counterclaim or recoupment which a person may have against another ... to satisfy whatever is owed,” and it also observed that the parties specifically contracted with regard to both the meaning of “setoff” as well as Nielsen‘s ability to satisfy any debt owed to him through a setoff of Evans‘s business interests. The district court ultimately concluded that under these circumstances, “it was reasonable for the arbitrator to hold that Nielsen was exercising his right to setoff Evans‘[s] business interests” and “proper for the arbitrator to exclude the UCC from consideration.” We agree.
¶13 The standard for showing either irrationality or manifest disregard for the law in an arbitration award is very high. At arbitration, Nielsen argued that the Note was enforceable and created setoff rights specifically excluded from the UCC by subsection 109(4)(j). See
¶14 Evans‘s argument is certainly plausible. The Setoff Provision in the Note could be interpreted as creating a true setoff falling outside of the UCC rather than a security interest appropriately governed by the UCC. But the arbitrator relied heavily on the parties’ express agreement that Nielsen could choose to “setoff” Evans‘s ownership interests in the Tax Companies against any amount Evans owed Nielsen under the Note. Were the district court required to review the award under the standards applicable to questions of law on appeal, Evans‘s arguments might have prevailed. But the district court does not review an arbitration award for legal error. Rather, as noted in Buzas, an arbitrator‘s award may not be set aside unless it is so “completely irrational” that “reasonable minds could agree that ... [the award] was not possible under a fair interpretation of the [evidence].” Id. at 950 (alterations and omission in original) (citations and internal quotation marks omitted); see also id. (“[T]he irrationality principle must be applied with a view to the narrow scope of review in arbitration cases.” (citation and internal quotation marks omitted)). So while Evans‘s contentions may have merit in a broader sense (something we do not decide here), the district court‘s only duty was to determine whether the arbitrator‘s award was “without foundation in reason or fact,” not whether it was correct as a matter of law. See id. (citation and internal quotation marks omitted). Evans has failed to demonstrate that the district court erred when it answered affirmatively the question of whether the arbitrator had “a rational basis to not apply the UCC” in this case where the arbitrator‘s decision rested heavily on the language of the Note itself as well as the relevant statutes. See Softsolutions, 2000 UT 46, ¶ 11 (explaining that the “irrationality principle” requires a showing that the award was “without foundation in reason or fact”
¶15 We again reserve the question of the applicability of the doctrine of “manifest disregard of the law” for another day, see supra ¶ 9 note 2, because Evans has failed to persuade us that even if this doctrine were to be applied to this case, the district court erred in determining that the arbitrator did not simply disregard the law in agreeing with Nielsen‘s theory of the case instead of Evans‘s. “Manifest disregard of the law” is “more than error,” and Evans has made no claim that the arbitrator failed to “appreciate[] the existence of a clearly governing legal principle but decide[d] to ignore or pay no attention to it.” Buzas, 925 P.2d at 951 (citation and internal quotation marks omitted). Rather, as the district court noted, the arbitrator was “cognizant of the governing laws in this matter” and the arbitration award itself clearly spelled out the arguments advanced by Evans and cited the UCC in rejecting them. Indeed, there was considerable legal dispute over the meaning of the Note‘s Setoff Provision and whether it fell within the scope of the UCC, a dispute the arbitrator ultimately resolved—rightly or wrongly—by deciding that the UCC did not apply. But even if the arbitrator was wrong (which, again, we do not decide), his error was one that a rational person might make, not the result of a decision to ignore a clearly applicable legal principle. Accordingly, Evans has failed to carry his burden of demonstrating that the Note, rather than creating a right of setoff against his interests in the Tax Companies, as it stated, instead so clearly created a security interest governed by the UCC that this conclusion was “obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.” See id. (citation and internal quotation marks omitted); see also Pacific II, 2001 UT 36, ¶ 15 (“Pacific‘s manifest disregard argument simply amounts to a ‘manifest disagreement’ with the arbitrator‘s findings and final award.” (citation and internal quotation marks omitted)).
¶16 Accordingly, we conclude that the district court did not err in determining that the arbitrator was neither “completely irrational” nor acting in manifest disregard of the law when he determined the UCC did not apply to the Note. We therefore decline to overturn the district court‘s confirmation of the arbitration award.3
II. The Arbitrator Did Not Refuse to Hear Relevant Evidence.
¶17 Evans next contends that the district court should have vacated the arbitration award because the arbitrator refused to hear relevant evidence. See
¶18 In support of his argument that the arbitrator could not consider the issue of default, Evans cites case law to the effect that district courts err when they “sua sponte grant summary judgment on an issue when neither party has sought summary judgment on that issue.” See Kell v. State, 2008 UT 62, ¶ 46, 194 P.3d 913. However, Evans ignores the fact that the principle on which he relies is grounded in the Utah Rules of Civil Procedure, see id. ¶ 47 (citing
ARBITRATION AGREEMENT. Arbitration—Binding Arbitration. [Nielsen] and each party to this agreement her[e]by agree, upon demand by any party, to submit any Dispute to binding arbitration in accordance with the terms of this Arbitration Program. A ”Dispute” shall include any dispute, claim or controversy of any kind, whether in contract or in tort, Legal or equitable, now existing or hereafter arising, relating in any way to this Agreement or any related agreement incorporating this Arbitration Program (hereinafter “Documents“), or any past, present, or future loans, transactions, contracts, agreements, relationships, incidents or injuries of any kind whatsoever relating to or involving [Nielsen] or any successor group of [Nielsen]. DISPUTES SUBMITTED TO ARBITRATION ARE NOT RESOLVED IN COURT BY A JUDGE OR JURY.
The issue of whether Evans had defaulted on the Note falls well within the scope of a “dispute, claim or controversy of any kind” related to the Note. Therefore, under the arbitration agreement set forth in the Note and signed by the parties, the issue was clearly within the scope of the arbitration agreement and within the arbitrator‘s authority to decide as part of his resolution of the parties’ dispute. And the arbitrator considered resolution of the question of whether the Note was in default to be central to his task: “To determine the effects of the foreclosure, if any, the Arbitrator had to determine whether the Note was in default, which triggers the right of foreclosure. Therefore, the issue of default was submitted to the Arbitrator for determination by the Parties’ [motions].” Evans has not shown that the arbitrator was bound to await the parties’ specific request before he could address the question of default when the parties’ cross-motions had already raised issues that clearly implicated the default question.
¶19 Having determined that the issue of default was properly before the arbitrator, we next consider whether the arbitrator refused to hear relevant evidence on that issue. See
¶20 Thus, what Evans claims was a refusal by the arbitrator to hear relevant evidence—that is, Evans‘s evidence regarding Nielsen‘s extension of the Note or waiver of the balance—was really a decision by the arbitrator that the additional evidence Evans proffered was insufficient as a matter of law to require a change in his decision that Evans had defaulted on the Note. In other words, the arbitrator appears to have actually considered the evidence Evans proffered in his motion and found it unpersuasive based on his interpretation of the language of the Note itself and the applicable law.
¶21 “Whether the court agrees with the arbitrator‘s judgment is irrelevant, as long as the arbitrator construed and applied the contract in an arguably reasonable manner.” Intermountain Power Agency v. Union Pac. R.R. Co., 961 P.2d 320, 323 (Utah 1998). Here the arbitrator determined, from the plain language of the Note along with other evidence presented by the parties that the Note was in default and rejected Evans‘s claims that the due date had been extended or payment of the balance waived. The arbitrator‘s interpretation and application of the Note was “arguably reasonable.” See id. As a consequence, Evans has failed to establish that the arbitration proceeding was not “fair and honest.” See Buzas, 925 P.2d at 941, 947 (citation and internal quotation marks omitted). We therefore decline to disturb the district court‘s ruling confirming the arbitration award on this ground.
III. Attorney Fees
¶22 Nielsen requests an award of the attorney fees he incurred on appeal. In general, “[a]n award of fees on appeal requires both a fee award below and success in the appellate court.” Holladay Towne Ctr., LLC v. Brown Family Holdings, LC, 2008 UT App 420, ¶ 25, 198 P.3d 990, aff‘d, 2011 UT 9, 248 P.3d 452. The district court expressly denied attorney fees below, ordering the parties to bear their own costs. Nielsen has not challenged that decision on appeal. Therefore, we decline to grant attorney fees on appeal.
¶23 Evans argues that Nielsen should be sanctioned for engaging in “irrelevant and scandalous personal attacks against Evans” in his briefing on appeal. While some of Nielsen‘s statements may have been intemperate, we conclude that Nielsen‘s conduct does not rise to a level warranting sanctions.5
CONCLUSION
¶24 We conclude that the district court did not err in refusing to vacate the arbitration award on the grounds that the arbitrator had exceeded his authority. We also conclude that the arbitrator did not refuse to hear relevant evidence on the issue of default. We therefore affirm the district court‘s ruling confirming the arbitration award. And because attorney fees were not awarded to Nielsen below, we decline to grant them on appeal.