Schmidt v. Schmidt ( 2014 )

NOTICE: NOT FOR PUBLICATION.
UNDER ARIZ. R. SUP. CT. 111(c), THIS DECISION DOES NOT CREATE LEGAL PRECEDENT
AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.
IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
JOSEPH M. SCHMIDT, Plaintiff/Appellee,
v.
STEVE P. SCHMIDT, Defendant/Appellant
And
ZOE CRAIN, Defendant/Appellee
No. 1 CA-CV 12-0701
FILED 08-05-2014
Appeal from the Superior Court in Maricopa County
No. CV2009-070395
The Honorable Eileen S. Willett, Judge
AFFIRMED
COUNSEL
Aiken Schenk Hawkins & Ricciardi, P.C., Phoenix
By Shawn K. Aiken, Robert C. Van Voorhees
Counsel for Defendant/Appellant Steve P. Schmidt
Jennings, Strouss & Salmon, P.L.C., Phoenix
By David Brnilovich
Counsel for Plaintiff/Appellee
Zoe Crain, Phoenix
Defendant/Appellee
SCHMIDT v. SCHMIDT
Decision of the Court
MEMORANDUM DECISION
Judge John C. Gemmill delivered the decision of the Court, in which
Presiding Judge Randall M. Howe and Judge Patricia A. Orozco joined.
G E M M I L L, Judge:
¶1 Steve P. Schmidt (“Steve”)1 challenges the superior court’s
confirmation of the arbitrator’s award, arguing that the arbitrator exceeded
his powers and miscalculated damages. For the reasons that follow, we
affirm.
BACKGROUND
I. Lone Cactus, L.L.C. and East Meets West, Inc.
¶2 Steve and his siblings, Joseph M. Schmidt (“Joseph”) and
Kathryn Crain (“Kathryn”), formed Lone Cactus Properties, L.L.C. (Lone
Cactus), a limited liability company, in 1996. Each sibling initially held a
one-third membership in Lone Cactus.
¶3 Lone Cactus’s principal asset was a commercial office
building in Phoenix. When this building opened, a corporation previously
formed and equally held by the three siblings, East Meets West, Inc.
(“EMW”), moved its operations into one of the building’s three suites.
EMW has paid rent to Lone Cactus without the benefit of a written lease.
¶4 Kathryn died in 2004. Her one-third membership in Lone
Cactus passed to her minor daughter, Zoe Crain (“Zoe”), and was held by
her widower, Timothy Crain (“Timothy”), under the Uniform Gift to
Minors Act, Arizona Revised Statutes (“A.R.S.”) sections 14-7651 to -7671.
Meanwhile, Kathryn’s one-third equity interest in EMW transferred to
Timothy.
1For clarity and brevity, we refer to the parties by their first names because
certain parties have the same last names. No disrespect is intended by the
use of first names.
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¶5 In 2001, Joseph sold his remaining stock in EMW to his fellow
EMW owners. As a result, Steve and Timothy owned shares in EMW, while
Zoe, Steve, and Joseph held one-third memberships in Lone Cactus. Steve
served as EMW’s sole officer and director and Lone Cactus’s manager
starting in 2004.
II. The Arbitration
¶6 Joseph filed a complaint in superior court alleging, among
other claims, that Steve had leased a Lone Cactus suite to EMW at below
market rates, and had failed to collect escalation and other fees from EMW
that it had charged other tenants. The complaint included (1) a derivative
claim for unpaid rent EMW allegedly owed Lone Cactus; (2) direct claims
on theories of breach of fiduciary duty, conversion, accounting, and freeze
out against Steve and Steve’s spouse; (3) an unjust enrichment/constructive
trust claim against Steve, Steve’s spouse, and EMW; and (4) a claim for
winding up and dissolution of Lone Cactus against Steve and Zoe.
¶7 In accordance with A.R.S. § 12-1502(A),2 Steve successfully
moved to compel arbitration pursuant to paragraph 7.5 of the Lone Cactus
Operating Agreement. According to Steve’s motion, the Operating
Agreement “broadly provides for arbitration” and “the complaint arises
out of the Operating Agreement.” EMW also requested arbitration in its
answer, but Steve initially contended that Joseph would have to pursue
claims against EMW in superior court. The parties subsequently signed a
stipulation stating that the arbitrator would determine “all issues of law
and fact that are framed by the Complaint” including claims against EMW.
¶8 Following a four-day hearing, the arbitrator issued an award
and findings. The arbitrator concluded that Steve had failed to discharge
his managerial obligations under the Operating Agreement to the extent he
exercised his judgment to benefit EMW at the expense of Lone Cactus.
Specifically, Steve failed to charge EMW for rent escalation, late fees, and
common area use fees but imposed these charges on other tenants. As a
result, the arbitrator held Steve liable not only to Joseph, but also to Zoe, for
breach of the implied covenant of good faith and fair dealing.
2 Because the arbitration commenced before January 1, 2011, the Uniform
Arbitration Act, A.R.S. §§ 12-1501 to -1518, applies rather than the Revised
Uniform Arbitration Act. See A.R.S. § 12-3001 historical and statutory note
(Supp. 2012).
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¶9 The arbitrator accordingly awarded Zoe and Joseph
$141,264.52 in lease underpayments, and awarded Lone Cactus $49,929.54
due on an EMW promissory note. In the event EMW continued to lease
space from Lone Cactus, the arbitrator directed that EMW and Lone Cactus
document any such lease with a written contract. Finally, the arbitrator
ordered the Lone Cactus members to select a new manager in accordance
with the Operating Agreement.
III. Confirmation of the Arbitration Award
¶10 Joseph and Zoe applied for the award’s confirmation
pursuant to A.R.S. § 12-1511. After briefing, the superior court granted the
application. It then awarded attorneys’ fees and costs and filed a signed
judgment.
¶11 This appeal followed. We have jurisdiction pursuant to
A.R.S. § 12-2101(A)(1).
DISCUSSION
¶12 This court reviews the superior court’s confirmation of an
arbitration award in the light most favorable to upholding its decision.
Atreus Cmtys. Grp. of Ariz. v. Stardust Dev., Inc., 229 Ariz. 503, 506, ¶ 13, 277
P.3d 208, 211 (App. 2012). We review de novo matters of statutory
interpretation. Nolan v. Kenner, 226 Ariz. 459, 461, ¶ 4, 250 P.3d 236, 238
(App. 2011).
¶13 Judicial review of arbitration awards is severely limited.
Creative Builders, Inc. v. Ave. Devs., Inc., 148 Ariz. 452, 456, 715 P.2d 308, 312
(App. 1986). “Except for certain well-defined circumstances . . . the trial
court has no authority to modify an arbitration award, even though the trial
court is convinced that the arbitrator[] [has] erred in [his] resolution of
factual or legal issues.” Id.
¶14 In Arizona, parties opposing an arbitration award can
challenge it only on grounds defined by statute. See Smith v. Pinnamaneni,
227 Ariz. 170, 177, ¶ 24, 254 P.3d 409, 416 (App. 2011). Steve contends that
the superior court erroneously confirmed the award because the arbitrator
exceeded his powers under A.R.S. § 12-1512(A)(3) and his allocation of
damages constituted a mathematical error under § 12-1513(A)(1).
I. Steve Is Not Entitled To Relief Under A.R.S. § 12-1512(A)(3).
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¶15 This court presumes that the arbitrator decided only those
issues submitted for arbitration. Einhorn v. Valley Med. Specialists, P.C., 172
Ariz. 571, 573, 838 P.2d 1332, 1334 (App. 1992). As the party seeking to
vacate the award, Steve has the burden of proof on this issue. Pawlicki v.
Farmers Ins. Co., 127 Ariz. 170, 173, 618 P.2d 1096, 1099 (App. 1980).
¶16 The parties’ agreements define the scope of the arbitrator’s
authority. Smitty’s Super-Valu, Inc. v. Pasqualetti, 22 Ariz. App. 178, 182, 525
P.2d 309, 313 (1974). The arbitrator’s interpretation of such documents is
final, unless the decision extends the arbitration beyond the matter
submitted. Einhorn, 172 Ariz. at 573, 838 P.2d at 1334. Paragraph 7.5 of the
Lone Cactus Operating Agreement provides:
Settlement of Discomforts and Disputes. Any
dispute or discomfort arising out of or in
connection with this agreement, including
disputes between or among the members, shall
be settled by the negotiation, mediation and
arbitration provisions of the American
Arbitration Association or other professional
arbitration association or organization.
This language is broad. See Prima Paint Corp. v. Flood & Conklin Mfg. Co.,
388 U.S. 395, 398 (1967) (characterizing a similar contractual provision
covering “claims and controversies arising out of or relating to this
Agreement” as “a broad arbitration clause”). Because the arbitration
provision expressly refers to the American Arbitration Association
(“AAA”), and the record does not reveal that the parties objected to those
rules, we conclude that the AAA Rules are binding on the parties. See A.P.
Brown Co. v. Superior Ct. In & For Pima Cnty., 16 Ariz. App. 38, 40, 490 P.2d
867, 869 (1971). AAA Rule R-47(a) states: “The arbitrator may grant any
remedy or relief that the arbitrator deems just and equitable and within the
scope of the agreement of the parties, including, but not limited to, specific
performance of a contract.”
A. The Stipulation Did Not Limit the Arbitrator’s Authority
under Paragraph 7.5 and the AAA Rules.
¶17 Notwithstanding the broad grant of authority under the
Operating Agreement and AAA Rule R-47(a), Steve argues that the parties’
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subsequent stipulation limits the scope of the arbitration clause and,
consequently, the arbitrator’s authority to grant relief under that clause.
According to Steve, the arbitrator exceeded his authority by adjudicating a
cause of action not asserted in the complaint, awarding damages to Joseph
and Zoe instead of Lone Cactus, directing Lone Cactus and EMW to put the
lease in writing, and ordering the members of Lone Cactus to elect a new
manager.
¶18 An arbitrator cannot resolve issues beyond the scope of a
submission agreement. See generally Clarke v. ASARCO, Inc., 123 Ariz. 587,
589, 601 P.2d 587, 589 (1979) (holding that the arbitrator’s authority was
limited by the parties’ agreement to arbitrate items “covered” in only one
paragraph). Even when their original contract contains a broad arbitration
clause, the parties may restrict or broaden the issues contemplated by that
clause. Greenspan v. Ladt, L.L.C., 111 Cal. Rptr. 3d 468, 487 (App. 2010).
¶19 In the absence of an express limitation, Arizona courts do not
assume that the parties intend to limit the arbitration’s scope. U.S.
Insulation, Inc. v. Hilro Constr. Co., 146 Ariz. 250, 258-59, 705 P.2d 490, 498-
99 (App. 1985) (declining to construe a clause requiring arbitration of “any
controversy” as applicable only to a partial breach of contract). We view all
applicable provisions as a whole. Saguaro Highlands Cmty. Ass’n v. Biltis,
224 Ariz. 294, 297, ¶ 10, 229 P.3d 1036, 1039 (App. 2010) (reconciling the
arbitration provisions in a restrictive covenant).
¶20 Other courts have taken this approach when construing the
arbitration agreement along with relevant submissions. See Hecla Min. Co.
v. Bunker Hill Co., 617 P.2d 861, 868 (Idaho 1980) (analyzing the parties’
submissions, along with the original agreement, in determining the
arbitrator’s authority, and concluding that the resulting grant of authority
was very broad absent “express limitation”); accord Wilcox Co. v. Bouramas,
392 N.E.2d 198, 202 (Ill. Ct. App. 1979) (in the absence of an express
reservation, the parties are presumed to agree that the arbitrator’s authority
extends to everything necessary to the ultimate decision); cf. French v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 784 F.2d 902, 909 n.9 (9th Cir.
1986) (holding that letter containing reservation of “the right to revoke the
signing of the Submission Agreement” did not preclude the court from
interpreting the stipulation and submission agreement as allowing
amendment of the underlying complaint). A narrow interpretation of a
submission “negates the very purpose of submitting disputes to arbitral
resolution.” Hecla, 617 P.2d at 868.
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¶21 Applying these principles, we find no express limitation or
exception in the parties’ stipulation. It provided that “all causes of action
alleged in [Action”] would “be decided in this Private Arbitration,” with
the complaint serving as the demand for arbitration. Further, the
stipulation provided that the arbitrator “has the power to decide all issues
of law and fact that are framed by the Complaint in CV2009-070395 and that
the Arbitrator has the power to grant the relief prayed for in CV2009-
070395.” In addition, the arbitrator would adjudicate the claims against
EMW “as derivative claims for the benefit of [Lone Cactus].”
¶22 The parties drafted the stipulation in an effort to settle their
dispute concerning the arbitrator’s authority to resolve claims against
EMW. The document does not refer to, let alone expressly attempt to limit,
the arbitrator’s authority under the Paragraph 7.5 arbitration clause or the
AAA Rules. It provides for derivative relief against EMW, but does not
expressly preclude the award of other relief. On this record, we cannot say
that the parties intended to withdraw the broad scope of authority
conferred in Paragraph 7.5 and the AAA Rules. See Moseley v. Brewer, 139
Ariz. 540, 542, 679 P.2d 563, 565 (App. 1984) (holding that the arbitrator had
authority to independently calculate a fee award in the absence of a
provision limiting the arbitrator to selecting one of two amounts provided
by the parties); see generally Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.
4th 362, 383, 384, 387 (1994) (holding that, “unless expressly restricted by
the agreement of the parties,” an arbitrator has discretion to fashion
remedies so long as they rationally relate to the contract and breach;
nothing in the order of reference, arbitration clause, or rules prevented the
arbitrator from devising a remedy consonant with his construction of the
contract’s implied covenants).
¶23 Steve invokes Allstate Insurance Co. v. Cook, but his reliance
upon that case is misplaced. 21 Ariz. App. 313, 519 P.2d 66 (1974). The Cook
court analyzed an arbitration clause which did not incorporate the AAA
rules. Id. at 314, 519 P.2d at 67. Cook held that the arbitrator had no
authority to resolve a coverage dispute between the insurer and insured,
because the insurance policy’s arbitration clause authorized arbitration
only concerning the insured’s right to recover damages from an uninsured
motorist. Id. at 315, 519 P.2d at 68; Scruggs v. State Farm Mut. Auto Ins. Co.,
204 Ariz. 244, 247, ¶ 10, 62 P.3d 989, 992 (App. 2003) (same). In the instant
case, the arbitration clause was broad—it allowed for any dispute arising
out of the agreement to be settled by the arbitration provisions of the AAA,
unlike the agreement in Cook. The stipulation placed no limits on the broad
clause.
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¶24 Equally unavailing is Steve’s reliance upon other Arizona
authorities. None of these cases concern an arbitrator’s authority under a
broad arbitration clause incorporating the AAA rules. See Goldsberry v.
Hohn, 120 Ariz. 40, 43-44, 583 P.2d 1360, 1363-64 (App. 1978) (upholding
denial of confirmation for award concerning the value of services because
arbitration agreement’s primary subject was the contingent fee agreement’s
validity, and party’s petition and testimony were confined to that issue);
Smitty’s, 22 Ariz. App. at 180, 525 P.2d at 311 (construing a clause requiring
arbitration of a rental adjustment and finding the arbitrators had not
exceeded their authority); Saguaro Highlands, 224 Ariz. at 296-98, ¶¶ 7-14,
229 P.3d at 1038-40 (interpreting provisions in the restrictive covenants on
whether arbitration was required for a claim concerning construction of an
improvement made by a homeowner).
B. The Complaint’s Allegations Provide A Basis For The Relief
Granted.
¶25 Even assuming that the stipulation limited the arbitrator to
the confines of the complaint, we find that he did not exceed that authority.
The arbitrator found: “[w]hile labeled differently, most of the claims here
really amount to assertions that [Steve] breached his obligations under the
Operating Agreement.” One such obligation under the Operating
Agreement – and every contract – was the implied covenant of good faith
and fair dealing, which prevents a party from impairing the rights of
another party to receive the benefits flowing from the contractual
relationship. See Rawlings v. Apodaca, 151 Ariz. 149, 153-54, 726 P.2d 565,
569-70 (1986).
¶26 The complaint supports the arbitrator’s view that Joseph’s
claims arise out of the Operating Agreement and include a breach of the
implied covenant of good faith and fair dealing. For example, Joseph
alleged that Steve had breached a fiduciary duty by failing to discharge his
obligations under the Operating Agreement. Further, Joseph’s request for
attorneys’ fees states that the complaint arises out of contract. Because Lone
Cactus was not a party to the Operating Agreement, the arbitrator reasoned
that relief for breach of that contract would necessarily accrue to its
members. And because these allegations arose out of or in connection with
the Operating Agreement, the superior court properly concluded that they
were subject to arbitration. See Mediterranean Enters., Inc. v. Ssangyong
Corp., 708 F.2d 1458, 1464 (9th Cir. 1983) (holding that breaches of an
agreement and of a fiduciary duty were subject to arbitration even though
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they arose under a narrower arbitration clause covering claims “arising
hereunder”). Also, Steve previously acknowledged in his demand for
arbitration that “the complaint arises out of the Operating Agreement of
[Lone Cactus.]” Having asserted this characterization of the complaint,
Steve cannot disclaim it once the arbitrator adopts it as a basis for relief.
¶27 Nor do we believe that the arbitrator’s authority was as
limited as Steve insists. To the extent that the arbitrator recharacterized
some complaint allegations as stating a breach of the implied covenant of
good faith and fair dealing, the Operating Agreement, submissions, and
AAA Rule R-47(a) allowed him to do so. Cf. SCM Corp. v. Fisher Park Lane
Co., 358 N.E.2d 1024, 1028 (N.Y. Ct. App. 1976) (holding that arbitrator had
authority to reform a contract, and explaining that arbitrators are charged
with fashioning relief in settings “free from the requirements and
expectations familiar to judicial proceedings with respect both to the
formulation of pleadings and causes of action and to historical and current
legal theories as to the availability of remedies”).
¶28 Finally, we note the arbitrator’s finding that Joseph “raised
breaches of the Operating Agreement as a source of liability during the
course of the arbitration.” Accordingly, it appears that the parties had
submitted the breach of contract issue during the hearing. See Coutee v.
Barington Capital Grp., L.P., 336 F.3d 1128, 1136 (9th Cir. 2003) (holding that
an arbitration panel could award fees even if not otherwise authorized by
law so long as “both parties submitted the issue to arbitration”). In the
absence of a transcript of the arbitration hearing, we have no basis to
conclude otherwise.
C. The Arbitrator Did Not Exceed His Authority By Granting
Relief To Zoe.
¶29 Likewise, we reject Steve’s claim that the parties’ stipulation
precluded the arbitrator from granting relief to Zoe. The operating
agreement expressly provided that any dispute arising out of or in
connection with the agreement must be settled by arbitration. And the
stipulation between the parties merely reaffirmed the parties’ decision to
arbitrate the current claims so as to avoid multiple or inconsistent results.
At the time the parties signed the stipulation, Zoe had filed no claim against
Steve or any other party. Consequently, Steve reasons that Zoe’s claim is
not covered by the stipulation and is beyond the arbitrator’s authority. Zoe
asserts that she did not bring a claim against Steve before the arbitration
order because her custodian, Timothy, and Steve had common counsel.
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After obtaining separate counsel, Zoe asserted her cross-claim in the
arbitration, adopting Joseph’s allegations. On this point, the parties never
expressly precluded amending the complaint to allow for Zoe’s cross-claim.
In light of this, we conclude that the arbitrator had authority to permit a
cross-claim and grant relief to Zoe. See French, 784 F.2d at 909.
D. The Arbitrator Did Not Exceed His Authority By Ordering
EMW And Lone Cactus To Reduce Future Leases To
Writing And Ordering Lone Cactus To Select A New
Manager.
¶30 Steve further argues that the arbitrator had no authority to
order the appointment of a new manager and require the parties to
document any future lease agreements. The Operating Agreement directs
that the managing member position rotate annually. Requiring the
selection of a new manager amounts to a specific performance of that
agreement. Under Rule R-47(a) alone, the arbitrator had authority to grant
such relief. See AAA Rule R-47(a). Indeed, the arbitrator had authority to
grant even broader relief. Cf. Malekzadeh v. Wyshock, 611 A.2d 18, 22-23
(Del. Ch. Ct. 1992) (holding that the arbitrator had authority, in a dispute
between general and limited partners, to delegate managerial duties to an
independent third party even though the contract assigned those duties to
the general partner).
¶31 Furthermore, the requirement that EMW and Lone Cactus
document any future lease agreements was a remedy designed to address
conduct raised by the complaint. Joseph had demanded an accounting, as
he was unable to determine the amounts of damage resulting from EMW’s
nonpayment of rent and other charges. Requiring a written lease would
facilitate accountability for charges to be paid by EMW. The arbitrator did
not require the parties to continue the lease arrangement; rather, he directed
them to reduce any future agreement to writing, just as Lone Cactus had
with its other tenants.
¶32 This relief was also consistent with the arbitrator’s authority
under Paragraph 7.5 and Rule R-47(a). In EEC Property Co. v. Kaplan, 578
N.W.2d 381, 386 (Minn. Ct. App. 1998), an arbitrator similarly exercised
broad remedial authority under the AAA Rules by permitting members to
withdraw from a partnership via a mandated buyout. The Minnesota court
found this relief within the arbitrator’s authority, even though the
partnership agreement did not expressly authorize it. Id. The court
reasoned that “[b]y not making adequate efforts to rent out the claimants’
space, the majority jeopardized the central function of the partnership.” Id.
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The parties could have limited the arbitrator’s authority, either in the
agreement initially or in submissions, but chose instead to incorporate the
AAA rules. Id.
¶33 The same logic applies here and supports the arbitrator’s
grant of less sweeping relief. See id.; see also In re Astey, 189 N.Y.S.2d 2, 4-5
(Super. Ct. 1959) (holding that arbitrator is authorized under a broad clause
to grant equitable relief even though it could not properly be awarded in a
court, including providing for successive options); accord Wilcox, 392 N.E.2d
at 202 (in the absence of an express reservation, the arbitrator had authority
to resolve fiduciary duty and good faith contract review claims, and was
authorized to address “everything, both as to law and fact, which is
necessary to the ultimate decision”).
II. Steve Is Not Entitled To Relief Under A.R.S. § 12-1513(A)(1).
¶34 Steve alternatively contends that the arbitrator made
mathematical errors in awarding all damages to Joseph and Zoe. Under
A.R.S. § 12-1513(A)(1), the court shall modify or correct an award if “[t]here
was an evident miscalculation of figures or an evident mistake in the
description of any person, thing or property referred to in the award.”
¶35 According to Steve, the damages should go to Lone Cactus.
This would allow Steve to share in the award by virtue of his one-third
interest in Lone Cactus. We conclude, however, that the decision to award
damages to Zoe and Joseph was not a miscalculation within the meaning of
A.R.S. § 12-1513(A)(1). It reflected the arbitrator’s considered choice not to
grant Steve a benefit for self-dealing. See Palmer v. Duke Power Co., 499
S.E.2d 801, 808 (N.C. Ct. App. 1998) (holding that the failure to include pre-
judgment interest in an award was not a mathematical error)
¶36 Assuming, without deciding, that the award is erroneous, it
is not subject to attack “merely because one party believes that the
arbitrator[] erred with respect to factual determinations or legal
interpretations.” Hirt v. Hervey, 118 Ariz. 543, 545, 578 P.2d 624, 626 (App.
1978); Smitty’s, 22 Ariz. App. at 182, 525 P.2d at 313 (finding that the trial
court erred in modifying an arbitrator’s award based upon an alleged error
of law); see also Pawlicki, 127 Ariz. at 173, 618 P.2d at 1099 (holding that the
trial court erroneously set aside an arbitration award based upon an
arbitrator’s incorrect findings of fact).
CONCLUSION
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¶37 We affirm the superior court’s confirmation of the arbitrator’s
award. In addition, we award Joseph and Zoe attorneys’ fees and costs on
appeal pursuant to Paragraph 7.6 of the Operating Agreement, contingent
upon their compliance with Rule 21(a) of the Arizona Rules of Civil
Appellate Procedure. We deny Steve’s request for attorneys’ fees and costs
on appeal.
:gsh
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