Herbal Integrity, LLC v. Scott Huntley, Jr. ( 2012 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
December 14, 2011 Session
HERBAL INTEGRITY, LLC, ET AL. v. SCOTT HUNTLEY, JR., ET AL.
Direct Appeal from the Chancery Court for Davidson County
No. 09-1666-II Carol L. McCoy, Chancellor
No. M2011-00810-COA-R3-CV - Filed January 11, 2012
The parties agreed to submit the valuation of Defendants’ membership in Plaintiff LLC to
arbitration. Following arbitration, Defendants moved to vacate the arbitrator’s award. The
trial court denied the motion and entered final judgment in the matter. Defendants appeal.
We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed
and Remanded
D AVID R. F ARMER, J., delivered the opinion of the Court, in which H OLLY M. K IRBY, J., and
J. S TEVEN S TAFFORD, J., joined.
Kenneth R. Jones, Jr., Nashville, Tennessee, for the appellants, Scott Huntley, Jr., and Lee
Huntley.
Gregory H. Oakley, Nashville, Tennessee, for the appellees, Herbal Integrity, LLC and Mark
Schumacher.
OPINION
Herbal Integrity, LLC (“Herbal Integrity”) is a Tennessee limited liability company
that sells nutritional supplements. Plaintiff Mark Schumacher (Mr. Schumacher) and
Defendant Scott Huntley, Jr. (Mr. Huntley) were members of Herbal Integrity when this
dispute arose. Mr. Schumacher is the managing member of Herbal Integrity; Mr. Huntley
is a resident of the State of California and his wife, Defendant Levon (“Lee”) Huntley (Ms.
Huntley), has a community property interest in Herbal Integrity.
In August 2009, Mr. Schumacher filed a complaint for damages against Mr. Huntley
and Ms. Huntley (collectively, Huntleys) in the Chancery Court for Davidson County. In
July 2010, the parties entered an agreed order under which Huntleys’ membership interest
in Herbal Integrity were terminated and Mr. Schumacher was awarded a judgment in the
amount of $65,000. The parties agreed that Huntleys were entitled to be paid the fair market
value of their membership interest, however, and that the value of Huntleys’ membership
interest would be applied to offset the judgment amount. If Huntleys’ membership interests
exceeded the judgment, Huntleys were to be entitled to the excess. Under the agreed order,
the value of Huntleys’ membership interests was to be determined by a business valuation
arbitrator. The agreement provided, in relevant part:
All parties may supply the Arbitrator with whatever documents or information
that they deem relevant to the process. The Arbitrator may request information
from any party, and all parties agree to comply with any such request within
the time required by the Arbitrator. Each party will have the right to submit
a response to information or documents produced by an opposing party, except
that completion of the Arbitrator’s decision within the time required by this
order will not be delayed by his or her awaiting receipt of a response from any
party. Subject to the deadlines for completion of the arbitration established by
this order, the arbitrator shall have the discretion to determine the documents
and information that the parties may be required or permitted to produce, as
well as how, when, and where such documents and information will be
produced. Each party shall serve counsel for opposing parties with copies of
any materials that are submitted to the arbitrator.
The trial court’s order further provided that the Arbitrator’s decision on the value of
Huntleys’ membership interest would be conclusive and binding, subject only to the
provisions of the Tennessee Uniform Arbitration Act as codified at Tennessee Code
Annotated § § 29-5-301, et seq.
Following arbitration, the Arbitrator determined that a fair value for a 50 percent
ownership interest in Herbal Integrity as of July 31, 2010, was $1,106.00. The Arbitrator
recommended that the amount of $1,106.00 be deducted from the judgment award of $65,000
to Mr. Schumacher. On December 22, 2010, Mr. Schumacher filed a motion to reduce the
amount of judgment and enter final judgment in accordance with the Arbitrator’s
determination. He asserted, however, that Huntleys owned a 35 percent membership interest,
and that the judgment accordingly should be reduced by $774.20.
In January 2011, Huntleys filed a motion in opposition to Mr. Schumacher’s motion.
Huntleys asserted, as an initial matter, that they held a 50 percent interest, and not a 35
percent interest as Mr. Schumacher asserted. They also asserted that the Arbitrator failed to
comply with the terms of the agreed order where the Arbitrator failed to provide Huntleys
-2-
with an opportunity to respond to information provided by Mr. Schumacher.
On January 18, 2011, Huntleys filed a motion to vacate the Arbitrator’s award under
Tennessee Code Annotated § 29-5-313(a), asserting that they were not provided with copies
of documents submitted by Mr. Schumacher to the Arbitrator during the valuation process
until after the Arbitrator completed his report on December 9, 2010. Huntleys further
asserted that they never received an account of oral communications between Mr.
Schumacher and the Arbitrator, and that they did not have an opportunity to respond to the
information provided by Mr. Schumacher. Huntleys asserted the Arbitrator accepted values
included on a balance sheet submitted by Mr. Schumacher, which did not include values for
certain distribution agreements or intellectual property. They further asserted that Mr.
Schumacher had made false statements concerning Herbal Integrity’s assets, which the
Arbitrator accepted as true. In their motion, Huntleys asserted the Arbitrator’s award should
be set aside pursuant to Tennessee Code Annotated § 29-5-313(a) because the award was
procured by “fraud or other undue means” where Mr. Schumacher provided false information
to the Arbitrator. Huntleys further asserted that the Arbitrator’s failure to give them an
opportunity to respond to information provided by Mr. Schumacher amounted to
“misconduct prejudicing [their] rights,” and that the Arbitrator exceeded his powers by
denying them the opportunity to respond as required by the agreed order. They further
moved the court to establish deadlines for the selection of a new arbitrator, to specify terms
and procedures for retaining a new arbitrator, and to stay enforcement of the July 12, 2010,
judgment pending arbitration. Huntleys attached to their motion Mr. Huntley’s affidavit
describing alleged inaccuracies in the information provided by Mr. Schumacher to the
Arbitrator. They also attached an affidavit of their legal counsel in Tennessee, who attested
to Huntleys’ assertion that they were not provided with copies of documentation or
information regarding oral communications between Mr. Schumacher and the Arbitrator until
he requested them after receiving the Arbitrator’s report.
Mr. Schumacher filed a response to Huntleys’ motion in February 2011. Mr.
Schumacher asserted that no information was misrepresented or concealed from the
Arbitrator, and the information asserted by Mr. Huntley in his affidavit was considered by
the Arbitrator or was not material to the Arbitrator’s conclusion. Mr. Schumacher asserted
that the engagement letter entered into by the parties and the Arbitrator provided that the
Arbitrator would provide copies of all information provided to him upon request, and the
Huntleys failed to request copies of information despite at least three e-mails notifying them
that information was forthcoming and/or had been received. Mr. Schumacher also asserted
that the parties agreed to allow the Arbitrator to engage in ex parte communications, and that
Huntleys did not request that the Arbitrator inform them of the substance of his interview
with Mr. Schumacher. Mr. Schumacher further asserted that the Arbitrator did not exceed
his authority where he decided only the issue within the scope of the agreed order. He
-3-
submitted that there was nothing in the agreed order requiring the Arbitrator to provide either
party with information, and that the parties’ engagement agreement with the Arbitrator
required the Arbitrator to provide copies of information only upon request. Mr. Schumacher
asserted that Huntleys never exercised their right to request copies.
Following a hearing on February 11, 2011, the trial court denied Huntleys’ motion to
vacate the Arbitrator’s award. The trial court found that the arbitration award was not
procured by corruption, fraud or undue means, and that the Arbitrator considered the
information that the Huntleys asserted he had not. The trial court also found that the agreed
order setting forth the terms of the arbitration agreement did not impose a duty or obligation
on the Arbitrator to provide either party with documents or information provided by the
opposing party, and that Huntleys had not requested copies from the Arbitrator as provided
by the engagement letter. The trial court further found there had been no misconduct by the
Arbitrator. The trial court entered judgment in favor of Mr. Schumacher, reducing the
judgment in his favor by $1,106.00. The trial court entered final judgment in the matter on
March 8, 2011, and Huntleys filed a timely notice of appeal to this Court.
Issue Presented
Huntleys present the following issue for our review:
Must the decision of an arbitrator who determined that the value of defendants’
membership interest in Herbal Integrity, LLC was only $1,106.00 be vacated
pursuant to T.C.A. § 29-5-313(a)(3) because the arbitrator exceeded his
powers under the arbitration agreement when he failed to give [Huntleys] an
opportunity to respond to documents and information submitted by [Mr.
Schumacher]?
Standard of Review
The issue presented by this appeal is governed by Tennessee Code Annotated § 29-5-
313(a)(3)(2000), which provides that an arbitration award shall be vacated where it is
demonstrated that an arbitrator has exceeded his authority. It is now well-settled that “‘courts
should play only a limited role in reviewing the decisions of arbitrators.’” Williams Holding
Co. v. Willis, 166 S.W.3d 707, 710 (Tenn. 2005)(quoting Arnold v. Morgan Keegan & Co.,
914 S.W.2d 445, 448 (Tenn. 1996)). In deciding whether to set aside an arbitrator’s award,
the trial court is limited to the statutory grounds. Id. An arbitrator exceeds his authority
when he decides a matter that is not within the scope of the agreement to arbitrate. Id. at 711.
“An arbitration award cannot be vacated because the arbitrator made a mistake of fact or law,
and it also cannot be vacated because it is irrational, or provides relief that could not or
-4-
would not be granted by the court.” Chattanooga Area Reg’l Transp. Auth. v. Local 1212
Amalgamated Transit Union, 206 S.W.3d 448, 451 (Tenn. Ct. App. 2006) (citing Arnold v.
Morgan Keegan & Co., 914 S.W.2d 445, 450 (Tenn.1996)). Upon review in an arbitration
case, we review findings of fact under a clearly erroneous standard, and review questions of
law with the “‘utmost caution, and in a manner designed to minimize interference with an
efficient and economical system of alternative dispute resolution.’” Id. (quoting Arnold v.
Morgan Keggan & Co., 914 S.W.2d 448, 449–50.
Discussion
In their brief to this Court, Huntleys assert that the Arbitrator exceeded his authority
because he issued a decision without complying with all the terms of the agreed order
establishing the terms of arbitration. Huntleys assert that, because the terms of the agreed
order to arbitrate require that each party be given an opportunity to respond to information
provided by the other, the Arbitrator lacked authority to make a determination without
providing Huntleys with an opportunity to respond.
Mr. Schumacher, on the other hand, asserts the engagement letter signed by the parties
with the Arbitrator provided that the Arbitrator would provide copies of all materials and
information upon request and upon payment for reproduction costs. Mr. Schumacher asserts
that the Arbitrator made several requests for information from Mr. Schumacher, and that
Huntleys were copied with these requests. Mr. Schumacher asserts he responded to the
Arbitrator’s requests for information by e-mail, that the Arbitrator informed counsel for both
parties that information was “coming in,” and that Huntleys did not ask the arbitrator or Mr.
Schumacher’s counsel to forward any information that was submitted to the arbitrator. Mr.
Schumacher further asserts Huntleys had the opportunity to provide the arbitrator with any
information they thought was relevant.
In their reply brief, Huntleys assert that Mr. Schumacher mischaracterizes their
argument. They assert that they do not argue that the Arbitrator was required to provide them
with copies of Mr. Schumacher’s evidence. Huntleys assert Mr. Schumacher failed to serve
them with the information provided by Mr. Schumacher, and that the Arbitrator exceeded his
powers by making a determination without providing Huntleys with an opportunity to
respond to Mr. Schumacher’s assertions.
The summation of Huntleys’ argument, as we understand it, is that the Arbitrator was
not required to provide them with copies of evidence submitted by Mr. Schumacher, but that
the Arbitrator simply had no authority to issue his decision because Huntleys had not been
provided with copies of that evidence. Although we are not insensitive to Huntleys’ assertion
that they did not receive copies of information provided by Mr. Schumacher prior to
-5-
receiving the conclusions of the Arbitrator, we agree with the trial court that it was not the
Arbitrator’s responsibility to provide Huntley’s with copies of the evidence in the absence
of a request from Huntleys. Huntleys do not dispute that they received e-mails advising them
that Mr. Schumacher was providing documents to the Arbitrator, and they do not dispute that
they did not request copies from the Arbitrator. Huntleys do not assert that they made a
demand upon Mr. Schumacher, or that they attempted to provide the Arbitrator with evidence
and were not permitted to do so. Additionally, Huntleys do not assert that the question
decided by the Arbitrator was not within the scope of the agreed order to arbitrate.
In light of the record, we agree with the trial court that the Arbitrator did not exceed
his authority in this case. The Arbitrator did not deny Huntleys the opportunity to provide
evidence or to respond, and it was not incumbent upon him to provide Huntleys with copies
of evidence supplied by Mr. Schumacher in the absence of a request from Huntleys. In this
case, Huntleys apparently made no attempt to supply the Arbitrator with information, or to
make demand upon Mr. Schumacher or the Arbitrator for information or documentation.
Although it is not disputed that Mr. Schumacher did not serve Huntleys with copies of
information that he provided the Arbitrator, Huntley’s apparently have abandoned their
assertions of fraud or misuse on the part of Mr. Schumacher in light of the trial court’s
findings.
Holding
In light of the foregoing, we affirm the judgment of the trial court. Costs of this
appeal are taxed to the Appellants Scott Huntley, Jr., and Lee Huntley, and their surety, for
which execution may issue if necessary.
_________________________________
DAVID R. FARMER, JUDGE
-6-