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In the Matter of: Douglas L. Swenson, Jeremy Swenson, and David v. Bushman Investment Properties

April 27, 2012

IN THE MATTER OF: DOUGLAS L. SWENSON, JEREMY SWENSON, AND DAVID SWENSON,
PETITIONERS,
v.
BUSHMAN INVESTMENT PROPERTIES, LTD., A UTAH LIMITED PARTNERSHIP, HOLMAN DBSI ARAPAHOE, LLC, A UTAH LIMITED LIABILITY COMPANY, JOHN M. CLAYTOR, AS CO-EXECUTOR OF THE ESTATE OF WILLIAM M. CLAYTOR, CHARLEY A. SIMMONS, SHIRLEY A. SIMMONS, LINDA GRANA, WILLIAM J. MURPHY, AND JOSEPH KLEM AND ANNA KLEM 2003 REVOCABLE TRUST, RESPONDENTS.



The opinion of the court was delivered by: U. S. District Judge Honorable Edward J. Lodge

MEMORANDUM DECISION AND ORDER

INTRODUCTION

In January 2012, an arbitrator awarded the respondents in this case approximately $458,000 in damages plus an additional $2.27 million in "potential prospective" damages if certain contingencies occur. The respondents move to confirm the arbitration award (Dkt. 27), and the petitioners move to vacate it. (Dkts. 49, 57). The motions have been fully briefed and the Court has determined oral argument would not assist the decision-making process. The Court will therefore decide the motions without a hearing. For the reasons explained below, the Court will vacate one ambiguous portion of the award and remand that portion to the arbitrator for clarification. The Court will confirm the award in all other respects.

BACKGROUND

The respondents are a group of real estate investors. In the fall of 2008, they purchased fractional interests in a piece of vacant land in Arapahoe County, Colorado from a business known as DBSI E-470 East LLC. At the time, DBSI E-470 was a wholly owned and managed subsidiary of DBSI, Inc. DBSI, Inc., in turn, was a real estate investment company based in Boise, Idaho. Petitioner Douglas Swenson is the former president, CEO, and majority owner of DBSI, Inc. His sons, petitioners Jeremy and David Swenson, were employees of a DBSI affiliate called DBSI Realty.

The investors originally sued DBSI E-470 and the Swensons in March 2009 in federal district court in Colorado. The claims against DBSI E-470 were stayed because that entity had filed bankruptcy in November 2008. The Colorado district court concluded it lacked jurisdiction to compel arbitration in Idaho, but ordered the Swensons to commence an action in Idaho seeking to compel arbitration. This action ensued.

In July 2010, this Court ordered the parties to commence binding arbitration. See Dkt. 19. The arbitrator conducted an evidentiary hearing from June 27 through July 1, 2011 and issued an interim award in September 2011, finding all three Swensons liable for breach of contract, and finding Douglas Swenson liable for fraud. In December 2011, the arbitrator issued his final damages award, and then modified that award in January 2012.

ANALYSIS

Before reaching the merits of the pending motions, the Court must resolve two threshold arguments. First, the investors argue that the Swensons' motions to vacate were not timely filed. Second, the investors argue that the arbitrator's award is not subject to judicial review because the parties expressly waived that right in their arbitration agreement.

The Court easily rejects the first argument -- the motions to vacate were timely filed. The Court also rejects the second argument, though this presents a closer question. As explained below, although the parties waived all rights to appeal, they did not waive the right to have this Court conduct a limited judicial review of the arbitration award under the Federal Arbitration Act.

A. Timeliness of Motion to Vacate

The deadline for moving to vacate an arbitration award is three months after the arbitrator issues the award. 9 U.S.C. § 12. The investors argue that the clock started ticking in September 2011, when the arbitrator issued his interim award -- meaning that the three-month period would have expired in December 2011, well before the Swensons filed their February 2012 motions. The Swensons argue that the three-month period did not begin to run until January 2012, when the arbitrator modified his December 2011 final award. The interim award related to liability; the final award dealt with damages.

Ninth Circuit law is clear on this point. An interim award "may be deemed final for functus officio purposes if the award states it is final, and if the arbitrator intended the award to be final." Bosack v. Soward, 586 F. 3d 1096, 1103 (9th Cir. 2009).Here, the interim award does not state it is final and there is no indication that the arbitrator intended it to be final. Rather, at the conclusion of the hearing, the arbitrator stated that he was keeping the hearing open until "we deal with interim award issues, attorneys' fees, interests, those types of things." Arbitration Hearing Transcript, Ex. C. to Ostrovsky Dec., Dkt. 48-1, at 1336:13-23; see also id. at 43:3-7; 1333:19-22. Additionally, there is no evidence that the parties believed the interim award was final. The Swensons' motions to vacate were therefore timely filed.

The investors' citation to various non-binding authorities does not change this conclusion. Relying on these authorities, the investors argue that if arbitration proceedings are bifurcated into liability and damages phases, an interim award adjudicating liability is final. See Reply, Dkt. 45, at 7 (citing, among other cases, Nat'l Mut. Ins. Co. v. First State Ins. Co., 213 F. Supp. 2d 10, 16-17 (D. Mass 2002)). But these cases recognized that the arbitrator and the parties must understand that the ruling on liability was a final award. See, e.g, id. (citing Providence Journal Co. v. Providence Newspaper Guild, 271 F.3d 16 (1st Cir. 2001)); McGregor Van De Moere, Inc. v. Paychex, Inc., 927 F. Supp. 616, 618 (W.D.N.Y. 1996) ("nothing in the record that even remotely suggests that the parties and the panel itself believed that the panel's decision on liability would be anything less than final."). Again, there is no indication in this case that the parties and the arbitrator understood the interim award to be the final award.

B. Court Authority to Review the Arbitration Award

The arbitration award is also subject to limited judicial review under the Federal Arbitration Act, despite the parties' agreement that the arbitration award would be "final and binding" and their more specific waiver of appellate rights. The arbitration clause reads as follows:

7.18 Arbitration of Disputes.

7.18.1 All Claims Subject to Arbitration. Any dispute, controversy or other claim arising under, out of or relating to this Agreement or any of the transactions, contemplated hereby, or any amendment thereof, or the breach or interpretation hereof or thereof, shall be determined and settled by binding arbitration in Boise, Idaho in accordance with Idaho law, and the rules and procedures of the American Arbitration Association. The substantially prevailing party shall be entitled to an award of its reasonable costs and expenses, including but not limited to attorney's fees and costs. Any award rendered therein shall be final and binding on each and all of the parties thereto and their personal representatives, and judgment may be entered thereon in any court of competent jurisdiction.

7.18.2 Waiver of Legal Rights. By initialing in the space below, the parties acknowledge and agree to have any dispute arising out of the matters included in this Section 7 decided by neutral arbitration as provided under Idaho law and that they are waiving any rights that may possess to have the dispute litigated in a court or by jury trial. The parties further acknowledge and agree that they are waiving their judicial rights to discovery and appeals except to the extent such rights are specifically included in this section. If either part refuses to submit to arbitration after execution of this Agreement and initialing below, such party may be compelled to arbitrate under the authority of Idaho law. Each party's agreement to this section is voluntary. The parties have read and understand the foregoing and agree to submit disputes arising out of the matters included in this section to neutral arbitration.

Purchase Agreement, Dkt. 52-4 (emphasis added).

The effect of this clause is not entirely clear. The Ninth Circuit has not squarely addressed whether a clause such as this eliminates judicial review under § 10(a) of the Federal Arbitration Act. It has twice indicated -- albeit in dicta -- that parties to an arbitration agreement can waive judicial review of the arbitrator's decision if they clearly state their intent to do so. In Kyocera Corp. v. Prudential-Bach Trade Services, Inc., 341

F.3d 987, 1000 (9th Cir. 2003) (en banc), an en banc panel of the Ninth Circuit held that parties could not expand federal review of an arbitration award beyond what 9 U.S.C. § 10(a) provides. But in reaching that decision, the court stated that "the decision to contract for a narrower standard of review than the courts generally apply in the absence of a statutory command is a decision that may be less troublesome than the attempt to contract for a broader standard of review than that authorized by Congress, although we need not resolve that question here." Id. at 998 n.16.

In an earlier decision, Aerojet-General Corp. v. American Arbitration Association, 478 F.2d 248, 251 (9th Cir. 1973), the Ninth Circuit observed that "[w]hile it has been held that parties to an arbitration can agree to eliminate all court review of the proceedings, the intention to do so must clearly appear." In that case, the court held that a clause providing that the arbitration was to be "final and binding" did not show clear intent to eliminate judicial review of the arbitrator's decision. See also Bown v. Amoco Pipeline Co., 254 F.3d 925, 931 (10th Cir. 2001) (citing Aerojet for the proposition that parties may eliminate judicial review by contract so long as their intention to do so is clear and unequivocal).

At least two other circuits, by contrast, have rejected the notion that parties can agree to waive all judicial review of arbitration awards. See Hoeft v. MVL Group, 343 F.3d 57, 64 (2d Cir. 2003); Rollins, Inc. v. Black, 167 Fed. Appx. 789 (11th Cir. Feb. 17, 2006) (unpublished disposition). In Hoeft v. MVL Group, 343 F.3d 57, the Second Circuit held that the "the freedom to contract, like any freedom, has its limits." Id. at 64. It reasoned that allowing parties to opt out of all judicial review would eviscerate the careful balance Congress had reached between encouraging arbitration and monitoring its basic fairness. Id.

Similarly, in Rollins Inc. v. Black, 167 Fed. Appx. 798 (11th Cir. Feb. 17, 2006) (unpublished decision), the Eleventh Circuit concluded that "a 'binding, final and non-appealable' arbitral award does not mean that the award cannot be reviewed. It simply means that the parties have agreed to relinquish their right to appeal the merits of their dispute; it does not mean the parties relinquish their right to appeal an award resulting from an arbitrator's abuse of authority, bias or manifest disregard of the law." Id. at 799 n.1.

Swensons relies on the Second Circuit's Hoeft decision to argue that this Court should review the arbitrator's decision. In view of the Ninth Circuit's dicta in Kyocera and Aerojet, however, reliance on Hoeft is improper. See Hoeft, 343 F.3d at 64 (describing Aerojet as one of the "far more scarce" decision that appear willing to narrow the scope of review of an arbitration award); accord Kim-C1, LLC v. Valent Biosciences Corp., 756 F. Supp. 2d 1258, 1266 (E.D. Cal. 2010) ("Since Aerojet acknowledges that parties may eliminate or restrict court review of arbitration proceedings, the Court does not believe it can follow Hoeft."). Rather, under Aerojet and Kyocera, the key question is whether § 7.18 of the parties' agreement (quoted above) is sufficiently clear to show that the parties intended to eliminate all judicial review.

The Court determines that because the parties did not use the word "review" (as opposed to "appeal") or otherwise plainly state that they wished to eliminate judicial review under the Federal Arbitration Act, this Court has the authority to conduct such a review. This decision is in accord with other decisions that focus on the word "review" (or variations thereof) in determining the parties' intent in this regard. In Kim-C1, LLC v. Valent Biosciences Corp., 756 F. Supp. 2d 1258, 1266 (E.D. Cal. 2010), for example, the Court held that the parties adequately expressed their intent to eliminate judicial review by agreeing that the arbitrator's rulings were "non-reviewable" in addition to being final and non-appealable. Additionally, in Communications Consultant Inc. v. Nextel Communications of the Mid-Atlantic, Inc., 146 Fed. Appx. 550, 552-53 (3d Cir. July 15, 2005) (unpublished decision), the Third Circuit enforced a clause stating that "[t]he decision of the arbitrators shall be final and unreviewable for error of law or legal reasoning of any kind and may be enforced in any court having jurisdiction of the parties." Id. (emphasis added). The Nextel Court explained that "[i]n the presence of such language, the only permissible basis upon which a litigant may challenge the panel's award is if the litigant can show that the panel's actions were influenced by 'corruption, fraud, or partiality,' or that the panel failed to provide a hearing to consider each party's views prior to issuing its decision." Id.

Here, the parties did not plainly state that the arbitrator's decision would be completely unreviewable. More specifically, they did not clearly and unequivocally foreclose review of this Court's limited, highly deferential review of the arbitration award in accordance with the Federal Arbitration Act. This Court will therefore consider the merits of the motions to vacate.

C. The Legal Standard

The Federal Arbitration Act authorizes district courts to enforce or vacate an arbitration award entered pursuant to a contractual arbitration agreement between parties.

9 U.S.C. §§ 9-11. Judicial review of arbitration awards is limited and highly deferential. See Sheet Metal Workers Int'l Ass'n v. Arizona Mechanical & Stainless, Inc., 863 F.2d 647, 653 (9th Cir.1988). The Act sets out specific grounds a court may vacate an arbitration award, including:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C. § 10(a). In addition to these statutory grounds, courts may vacate an arbitration award that is irrational or exhibits a "manifest disregard of the law." Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1060 (9th Cir. 1991). Manifest disregard of the law is more than error, however. As noted in Collins v. D.R. Horton, Inc., 505 F.3d 874 (9th Cir. 2007), courts "may not reverse an arbitration award even in the face of an erroneous interpretation of the law." Id. at 879. Similarly, erroneous findings of fact are not grounds for vacating an arbitration award. French v. Merrill Lynch, Pierce, Fenner & Smith, 784 F.2d 902, 906 (9th Cir. 1986). Rather, to demonstrate manifest disregard, a moving party must show that the arbitrators "understand and correctly state the law, but proceed to disregard the same." San Martine Compania De Navegacion, S.A. v. Saguenay ...


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