Christopher Ales Vs. Anderson, Gabelmann, Lower & Whitlow, P.c., F/k/a Anderson, Gabelmann, Ales, P.c.

IN THE SUPREME COURT OF IOWA
No. 03 / 04-2073
Filed March 16, 2007
CHRISTOPHER ALES,
Appellant,
vs.
ANDERSON, GABELMANN, LOWER &
WHITLOW, P.C., f/k/a ANDERSON,
GABELMANN, ALES, P.C.,
Appellee.
Appeal from the Iowa District Court for Scott County, Bobbi M.
Alpers, Judge.
An unsuccessful party to an arbitration proceeding appeals a district
court decision confirming in part and vacating in part the arbitration award.
AFFIRMED IN PART, REVERSED IN PART, AND CASE REMANDED
WITH DIRECTIONS.
Michael R. Blaser and Rebecca A. Brommel of Brown, Winick, Graves,
Gross, Baskerville and Schoenebaum, P.L.C., Des Moines, and Richard A.
Davidson of Lane & Waterman, LLP, Davenport, for appellant.
Louis R. Hockenberg and Lawrence P. McLellan of Sullivan & Ward,
P.C., West Des Moines, for appellee.
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WIGGINS, Justice.
An unsuccessful party to an arbitration proceeding that involved a
covenant not to compete appeals a district court decision confirming in part
and vacating in part the arbitration award. The district court confirmed the
award finding a breach of the covenant not to compete occurred. It also
confirmed the damages the arbitrator assessed for the breach. The district
court vacated the arbitrator’s attorney’s fees and costs determination and
remanded the case back to the arbitrator to determine an attorney’s fees
and costs award consistent with its decision. Because we agree substantial
evidence supports the arbitrator’s determination that the covenant not to
compete was breached and the damages he awarded for that breach, we
affirm that part of the district court’s decision. However, because we find
substantial evidence only supported part of the arbitrator’s award regarding
the attorney’s fees and costs, we reverse the judgment of the district court,
vacate the portion of the arbitration award regarding the fees and costs not
supported by substantial evidence, and confirm the portion of the award
regarding the fees and costs supported by substantial evidence. We also
remand the matter to the district court to determine an appropriate award
for the fees and costs incurred by the prevailing party in the district court
and on this appeal.
I. Background Facts and Proceedings.
Christopher Ales is a certified public accountant. After working for
over ten years in the tax department of two corporations, Ales opened his
own accounting practice. In December 1998 Ales merged his solo-practice
with Anderson, Gablemann, P.C. Anderson, Gabelmann, P.C., now known
as Anderson, Gabelmann, Lower, Whitlow, P.C. (AGLW), is a public
accounting firm located in Bettendorf, Iowa. AGLW agreed to purchase Ales’
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customer list for a one-third interest in the firm and a $205,000 promissory
note (the “Old Note”).
Before coming to AGLW, Ales began working on residential building
projects for low-income residents, commonly referred to as section 42
projects. Ales continued to work on section 42 projects while employed by
AGLW. By May 2000 friction had built between Ales and his partners. Ales
described this as “the beginning of the end,” and discussions began
regarding Ales leaving AGLW. By December 1 Ales and AGLW entered into
an agreement that provided the terms of Ales’ separation from AGLW.
Under the agreement, AGLW purchased Ales’ 1000 shares of stock in
the firm, his revalued client list, the Old Note, and Ales’ covenant not to
compete. Ales received $345,000 in consideration for these assets in the
form of a promissory note (the “New Note”). Ales also agreed “upon
reasonable request” to “use commercially reasonable efforts to assist
[AGLW] in retaining the clients on the Client List for the mutual benefit of
all parties to this Agreement.”
The covenant not to compete stated for a five-year period Ales
promises, within a fifty-mile radius from any office of AGLW established as
of December 1, 2000, not to
(a) provide like or similar services to those provided by [AGLW]
directly or indirectly, to any of [AGLW]’s clients (past or
present) or (b) either alone or in association with others,
directly or indirectly, organize, own, control, lend financial
support to, manage, operate, join, or become associated with,
represent, advise, render services to, or become employed by or
participate in any entity providing like or similar services to
those provided by [AGLW].
Exempt from the covenant not to compete were (1) any activities carried out
by Ales, directly or indirectly, in association with his section 42 projects; (2)
services provided by Ales to Watts Trucking Service, Inc. and its related
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entities and individuals; and (3) services provided by Ales to any company
in which Ales held a fifty percent or more interest.
The agreement also gave AGLW the right to offset against the New
Note “an amount equal to the last two year’s fees collected by [AGLW] from
the client with whom Ales is alleged to have violated the covenant not to
compete.” The agreement further provided if a dispute regarding the
agreement arose, the parties would submit the dispute to binding
arbitration under chapter 679A of the Iowa Code. Finally, the agreement
provided the prevailing party in any arbitration proceeding would be entitled
to reimbursement from the non-prevailing party of the actual attorney’s fees
and costs involved in pursuing or defending the claim.
After the agreement was signed, Ales remained in the AGLW offices
under a new leasing agreement. In February 2001 Ales moved his
operations to his home. Eventually by April or May Ales moved his office to
Renwick House, a historic home converted into office space. Renwick
House is located within fifty miles of AGLW’s offices. Ales continued to work
as a developer of section 42 projects through his various companies.
Diane Artioli, a certified public accountant, previously worked as a
part-time accountant for AGLW from 1998 to 2001. After leaving AGLW,
Artioli began working for another company, but by January 2002 Artioli had
opened her own practice. She first rented office space in Davenport. After
Artioli opened her office, a number of AGLW clients started requesting her
services. At this time, Artioli also started doing work for Ales and his
companies. In June 2002 Artioli closed her Davenport office and began to
work at Renwick House.
On September 17 AGLW notified Ales that it had “determined that
[Ales was] in violation of the Covenant Not To Compete . . . by providing like
or similar services as those provide by [AGLW], directly or indirectly, to
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certain of [AGLW]’s clients.” AGLW indicated the basis for its finding was
that: (1) as of March 8, 2002, clients Erickson Truck/Jack Erickson
Companies, KCM Construction/Kyle Meier Companies, D & D
Chevrolet/Kilberg Companies, Gary Clapp, Richard Yerington, Dr. Margaret
Millar, Ed Mowen, Richard Henson, and Roy Harper notified AGLW that
Artioli would be providing their professional accounting, tax, and consulting
services; (2) Ales continued to hold himself out as a practicing certified
public accountant and indirectly started accounting operations by hiring
Artioli and another employee to provide accounting or similar services from
Ales’ offices; and (3) Ales worked directly and/or indirectly and/or in
association with Artioli by providing, directly or indirectly, organization,
control, financial support, cost-sharing arrangements, management,
operating assistance, association, representation, and advisement, as
evidenced by Artioli working out of and utilizing staff within Ales’ office
building; and this evidenced that Ales was participating with Artioli to
provide like or similar services to those provided by AGLW. Due to these
allegations, AGLW offset the New Note by $154,305, representing the last
two years of fees collected by AGLW from the these clients.
AGLW sent an additional notice to Ales on July 1, 2003. In this
notice, AGLW alleged Ales had violated the covenant not to compete by
providing services to the Premier Properties group of corporations and Dr.
Alan Kendall. Due to this allegation, AGLW offset the New Note by an
additional $46,148, the amount representing the last two years of fees
collected from the Premier Properties group. Ales contested both notices.
Pursuant to the agreement an arbitration hearing was set.
Ales also filed a claim in district court requesting the acceleration of
the New Note. Ales alleged AGLW had improperly effectuated an offset of
$154,160 without notice at the time the offset was done. Ales also alleged
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AGLW untimely attempted to cure its default by revising Ales’ 1099 tax form
for 2002 and reverting to the original amortization schedule. AGLW filed a
motion to stay or in the alternative a motion to dismiss Ales’ claim. The
district court found Ales’ claim was not severable from the matters subject
to the arbitration and stayed the district court action pending the
completion of the arbitration.
The case proceeded to arbitration. At arbitration, the parties
stipulated AGLW held the burden of proof as to whether Ales violated the
covenant not to compete. The arbitrator considered the evidence and issued
a final decision and award on the merits and an interim decision on fees
and expenses. In this decision, the arbitrator found: (1) Artioli was a
certified public accountant offering accounting services from an office at
Renwick House; (2) these accounting services provided by Artioli were like
or similar to those provided by AGLW; (3) Artioli’s services were offered
within fifty miles from the AGLW office and at a time within five years
following the withdrawal of Ales from AGLW; (4) Ales controlled, financially
supported, and was associated with Artioli’s accounting practice and this
was a violation of the covenant not to compete; (5) AGLW’s interpretation of
the damage award is more persuasive and consistent with the clear intent of
the parties; therefore, AGLW’s interpretation is commercially reasonable
and closer to the ordinary and customary construction of the words in
question; (6) damages relating to AGLW’s claims in its September 17, 2002,
letter amounted to $149,570 (less $3920 for the unpaid portion of the
Erickson invoices) and that this amount should be subtracted from the New
Note as of September 17, 2002; (7) damages relating to AGLW’s claims in its
July 1, 2003, letter amounted to $49,480.10 and should be subtracted from
the New Note as of July 1, 2003; and (8) the lawsuit filed by Ales (and
stayed by the district court) is a violation of the arbitration clause in the
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agreement and AGLW’s actions in issuing a 1099 tax form and revised
amortization schedule did not constitute a default. The arbitrator awarded
AGLW an offset to the New Note of $145,650 as of September 17, 2002, and
another $49,480.10 as of July 1, 2003.
The arbitrator also decided AGLW was entitled to reimbursement of
its reasonable and necessary attorney’s fees and costs incurred in the
arbitration and in defending against Ales’ district court action to accelerate
payment of the New Note. However, at the time of this decision, the
arbitrator did not have all of the attorney’s fees and costs claimed by AGLW
before him. Instead, the arbitrator left AGLW’s attorney’s fees and costs
award unsettled. The arbitrator instructed the parties to confer and
attempt to negotiate and settle the amount of AGLW’s award for attorney’s
fees and costs. However, the arbitrator stated he would conduct a further
hearing on fees and costs if requested by either party.
At AGLW’s request, the arbitrator held a hearing to determine the
final award on attorney’s fees and costs. The arbitrator adjusted AGLW’s
claimed fees and costs of over $115,000 to $83,485.08 on the grounds that
some of the claimed fees and costs were incurred prior to the arbitration,
some were unrelated to the arbitration, some were excessive, and some were
duplicative.
After making these adjustments to the attorney’s fees and costs
claimed by AGLW, the arbitrator found there would be a fair allocation of
responsibility if Ales paid his own legal fees and costs of $73,312.52 and
fifty percent of AGLW’s adjusted claim, $41,742.54. The arbitrator
reasoned under the circumstances of this case, having Ales pay
$115,055.06 in fees and costs is commercially reasonable and consistent
with the “reasonable and necessary” standard of his interim decision. The
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arbitrator allowed AGLW to offset the New Note by $41,742.54, fifty percent
of AGLW’s attorney’s fees and costs, as of the date of the decision.
Ales applied to the district court for a vacation of the arbitration
award arguing the arbitrator exceeded his power and authority and/or
substantial evidence did not support the arbitrator’s findings. AGLW
answered Ales’ application and requested an order confirming the
arbitration award and entering judgment on the award in favor of AGLW.
AGLW also requested an award of attorney’s fees and costs for defending
Ales’ appeal. Further, AGLW applied for vacation of the final award of fees
and costs claiming the arbitrator’s award of fifty percent of its attorney’s
fees violated the agreement.
The district court considered both applications for vacation of the
arbitration award. First, the district court found substantial evidence
supported the arbitrator’s findings that Ales violated the covenant not to
compete and the damages awarded for that breach. Next, the district court
affirmed the authorization of the offsets to the New Note for the damages
incurred by AGLW for Ales’ breach of the covenant not to compete. In doing
so, the district court found the arbitrator did not exceed his authority by
creating the offsets because “[t]he covenant not to compete specified the use
of an offset if a violation of the covenant not to compete is determined and
allow[ed] for reimbursement of attorney’s fees and expenses incurred in the
resolution of a dispute.” Finally, the district court found, based on the
specific terms used by the parties in the agreement, the arbitrator exceeded
his authority when he reduced AGLW’s attorney’s fees and costs award by
finding the arbitrator had no authority to adjust the attorney’s fees and
costs. The district court confirmed the arbitrator’s findings relating to the
breach and the damage award for that breach, vacated the arbitrator’s
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award on attorney’s fees and costs, and remanded the case back to the
arbitrator as required by Iowa Code section 679A.12.
Ales appeals.
II. Issues.
A party may appeal a district court order regarding an arbitration
award, when the order confirms or denies confirmation of an arbitration
award or when the order modifies or corrects an award. Iowa Code
§ 679A.17(1)(c), (d) (2003). On appeal Ales argues: (1) the arbitrator’s
decision that Ales violated the covenant not to compete is not supported by
substantial evidence; (2) the entry of damages with respect to the Premier
Properties group of corporations and Dr. Kendall is not supported by
substantial evidence; and (3) the district court erred in granting AGLW’s
application for partial vacation of the award for attorney’s fees and costs.
III. Scope of Review.
The Code provides that we review the appeal of an arbitration award
“in the manner and to the same extent as from orders or judgments in a
civil action.” Iowa Code § 679A.17(2). Accordingly, our review is for
correction of errors at law because this is an appeal from a court order in a
civil law suit. $99 Down Payment, Inc. v. Garard, 592 N.W.2d 691, 693
(Iowa 1999); see also Wesley Retirement Servs. v. Hansen Lind Meyer, Inc.,
594 N.W.2d 22, 29 (Iowa 1999); Iowa R. App. P. 6.4. However, our review is
limited. See Humphreys v. Joe Johnson Law Firm, P.C., 491 N.W.2d 513,
515 (Iowa 1992) (finding the judicial review of arbitration awards is very
limited). Our function is not to determine whether the arbitrator has
correctly resolved the grievance. Postville Cmty. Sch. Dist. v. Billmeyer, 548
N.W.2d 558, 562 (Iowa 1996). “To allow courts to ‘second guess’ an
arbitrator by granting a broad scope of judicial review would nullify the very
advantages of arbitration.” $99 Down Payment, Inc., 592 N.W.2d at 694. A
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court cannot vacate or refuse to confirm the award even if the court could
not or would not grant the same relief. Iowa Code § 679A.12(2). As long as
an arbitrator’s award does not violate one of the provisions of section
679A.12(1), we will not correct errors of fact or law. Humphreys, 491
N.W.2d at 515.
IV. Analysis.
A. Substantial Evidence. The first two issues argued by Ales on
appeal concern whether substantial evidence supports the arbitrator’s
decision. With exceptions not applicable here, chapter 679A allows the
district court to vacate an arbitration award when substantial evidence on
the record as a whole does not support the award. 1 Iowa Code
§ 679A.12(1)(f). “Generally, evidence is substantial if a reasonable person
would accept the evidence as sufficient to reach a conclusion.” Humphreys,
491 N.W.2d at 516 (citation omitted). This court does not consider evidence
to be insubstantial merely because different conclusions can be drawn from
the evidence. State v. Dohlman, 725 N.W.2d 428, 430 (Iowa 2006). “[T]he
ultimate question is whether the evidence supports the finding actually
made, not whether the evidence would support a different finding.” Id.
(citations omitted). Our review of the record reveals substantial evidence
supports the arbitrator’s decision that Ales violated the covenant not to
compete and that the arbitrator properly calculated AGLW’s damages
attributable to the Premier Properties group of corporations and Dr.
Kendall.
Although there was conflicting testimony as to the extent of control
Ales had over Artioli’s accounting practice, there was ample evidence in the
1The district court cannot vacate an arbitration award for lack of substantial
evidence if the party urging the vacation of an arbitration award did not cause the
proceedings to be recorded or if the arbitration was conducted under the auspices of the
American Arbitration Association. Iowa Code § 679A.12(1)(f) (2003).
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record to support the arbitrator’s decision that: (1) Ales controlled,
financially supported, and associated with Artioli’s accounting practice;
(2) Artioli was providing services prohibited by the covenant not to compete;
and (3) this conduct was a violation of the covenant not to compete.
The evidence supports the arbitrator’s finding that Ales controlled and
associated with Artioli. Artioli held herself out as vice president of
Signature Construction Company, one of Ales’ companies, as Ales’ vice
president of finance, and as Ales’ chief financial officer. Artioli was involved
in the day-to-day management of some of Ales’ companies. She testified she
“provide[d] assistance to the accounting staff,” and generally oversaw Ales’
staff. Artioli described her duties to Ales as an “expansive list” and that she
“[did not] know that [she] could list everything that [she] do[es]” for Ales’
companies. Artioli assisted in the hiring of staff and participated in the
interview process for Ales’ office managers and a compliance regional
manager. When one of Ales’ companies contested paying unemployment
compensation for a former employee, Artioli represented the company at the
appellate hearing. She also handled banking matters and held signature
authority for Ales and his companies. Her authority encompassed the
ability to negotiate or discuss some contracts for Ales and his companies.
When applying for funding from the Iowa finance authority, Ales included
Artioli as one of his staff. Ales testified Artioli works at his behest and that
he had the right to define the role she would play on his behalf.
Importantly, sixty-four percent of Artioli’s gross revenues came from Ales
and his companies.
Additionally, Ales and Artioli shared a filing system at Renwick
House. Both Artioli and Ales had access to each other’s files. There was no
separation between Ales’ files and Artioli’s files, or between old files
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transferred from AGLW and new files created by Ales or Artioli at Renwick
House.
The record also shows that by February 2002 Artioli was doing public
accounting work for almost all of AGLW’s former clients that AGLW claimed
Ales was servicing and that Ales was servicing these clients through his
control and association with Artioli. Artioli did not advertise her business.
Her company was not listed in the yellow pages. Instead, Artioli testified
she relied on networking and word-of-mouth to promote her business.
Although Artioli claims she was not told how these former-AGLW clients
happened to walk through her door when they became her clients, she
stated she later became aware Ales referred these former-AGLW clients to
her. Factually, Ales referred numerous AGLW clients to Artioli. Ales
testified he believed because he had known these clients for years, his
referral lent some weight to these clients’ decisions to leave AGLW and go to
Artioli.
Finally, the evidence demonstrates Ales lent considerable financial
support to Artioli. Artioli’s office was located in Renwick House, which Ales
owns. Ales and Artioli had an oral lease agreement and Artioli paid $1200
per month in rent. Included in the lease price was the use of Renwick
House’s telephone service, fax machine, copier, internet service, and general
office supplies. Additionally, Artioli was able to utilize the services of Ales’
employees at a rate of $40 per hour. However, from the time Artioli opened
her office at Renwick House until the time of the arbitration hearing, a
period of fifteen months, Artioli only paid Ales $4500 for these services.
Ales also hired certain employees with Artioli’s needs in mind.
As to the evidence supporting the damages the arbitrator awarded for
the Premier Properties group of corporations and Dr. Kendall, the record
shows Artioli provided accounting services for Eagle Properties, Cheyenne
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Properties, Breckenridge Properties, and Quality Properties. Golden
Properties and LeAnn Equities also paid Artioli. Ales concedes Dr. Kendall
owns all of these entities, including Premier Properties. Bill Gabelmann, a
partner with AGLW, described Premier Properties as “a group of
approximately eight corporations with different properties associated with
each one.” These eight corporations include Breckenridge Properties,
Quality Properties, Cheyenne Properties, Eagle Properties, Golden
Properties, and LeAnn Equities. Breckenridge Properties, Quality
Properties, Cheyenne Properties, Eagle Properties, and Premier Properties
all registered with the Iowa secretary of state and listed the home office as
1318 4th Avenue, Moline, Illinois. Further, when Artioli billed Breckenridge
Properties, Quality Properties, Cheyenne Properties, and Eagle Properties
she always billed the same person—Mark Nelson, who worked for Premier
Properties. The record supports that Premier Properties was the umbrella
name for a group of entities all run by Dr. Kendall, all in the business or
related-business of property management.
The agreement provided damages for a breach of the covenant not to
compete in “an amount equal to the last two (2) year’s fees collected by
[AGLW] from the client with whom Ales is alleged to have violated the
Covenant Not to Compete.” The arbitrator allowed damages to be calculated
using fees generated by AGLW from 1997 to 1999, the last two years AGLW
collected fees from the Premier Properties group of corporations and Dr.
Kendall. Ales argues, “[t]his sentence clearly refers to the last two calendar
years’ fees, not fees that were billed and collected four to six years before
the violation allegedly occurred.”
On our limited review, “every reasonable presumption will be indulged
in favor of the legality of an arbitration award.” Humphreys, 491 N.W.2d at
514; see also Iowa Code § 679A.12(2) (stating “[t]he fact that the relief
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awarded could not or would not be granted by a court of law or equity is not
ground for vacating or refusing to confirm the award”). Further, when an
arbitrator interprets an agreement, the arbitrator is able to draw from the
“essence of the agreement” and “ ‘as long as the arbitrator is even arguably
construing or applying the contract and acting within the scope of his
authority’ even a court’s conviction that the arbitrator committed error does
not suffice to overturn the decision.” Domke on Commercial Arbitration,
§ 39:12, at 24 (3d ed. 2005) (quoting United Paperworkers Int’l Union v.
Misco, Inc., 484 U.S. 29, 38, 108 S. Ct. 364, 371, 98 L. Ed. 2d 286, 299
(1987)).
Under this standard, the arbitrator’s interpretation of the language in
the covenant not to compete allowed him to calculate the damages using
fees generated by AGLW from 1997 to 1999, the last two years AGLW
collected fees from the Premier Properties group of corporations and
Dr. Kendall rather than from the last two calendar years of fees.
Accordingly, we find substantial evidence supports the arbitrator’s decision
that Ales violated the covenant not to compete and the entry of damages
with respect to the Premier Properties group of corporations and
Dr. Kendall.
B. Attorney’s Fees and Costs. The agreement between the parties
stated, “the prevailing party shall be entitled to reimbursement from the
non-prevailing party of the actual attorneys’ fees and costs incurred” in
pursuing or defending a claim or dispute brought to arbitration or to a court
of competent jurisdiction under the agreement.
The arbitrator reduced AGLW’s claim for attorney’s fees and costs
twice. The arbitrator made the first reduction because some of the claimed
fees and costs were incurred prior to the arbitration, some were unrelated to
the arbitration, some were excessive, and some were duplicative. The
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arbitrator made the second reduction in order to balance the attorney’s fees
and costs each party had to pay.
The district court found the arbitrator should not have made either
reduction stating “[t]he arbitrator’s use of ‘reasonable and necessary’ legal
fees and expenses and the application of a reasonableness standard are not
supported by substantial evidence and do exceed the arbitrator’s power and
authority based upon the specific terms” of the parties’ agreement. The
district court then vacated the attorney’s fees and costs award and
remanded the dispute back to the arbitrator to determine the attorney’s fees
and costs in accordance with the court’s ruling.
A party’s disagreement with the arbitrator’s conclusion is not grounds
for vacating the award. Iowa City Cmty. Sch. Dist. v. Iowa City Educ. Ass’n,
343 N.W.2d 139, 144 (Iowa 1983). In discussing the arbitrator’s authority,
we have said:
“Unless the parties specifically limit the powers of the
arbitrator in deciding various aspects of the issue submitted to
him, it is often presumed that they intend to make him the
final judge on any questions which arise in the disposition of
the issue, including not only questions of fact but also
questions of contract interpretation, rules of interpretation,
and questions, if any, with respect to substantive law.”
Id. at 143 (citation omitted). The agreement between the parties gave the
arbitrator the authority, without limitation, to decide any dispute between
the parties concerning the agreement. Thus, the arbitrator had the
authority to decide the attorney’s fees and costs dispute and make any
reductions as allowed by his interpretation of the agreement and the
evidence.
We disagree with the district court’s determination that substantial
evidence did not support the arbitrator’s decision to make the first
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reduction in AGLW’s claim for attorney’s fees and costs. This reduction
reduced AGLW’s claim of over $115,000 to $83,485.08.
When a written contract allows for the recovery of attorney’s fees, the
award must be for reasonable attorney’s fees. Iowa Code § 625.22. The
burden is on the party seeking to recover fees “ ‘to prove both that the
services were reasonably necessary and that the charges were reasonable in
amount.’ ” Lynch v. City of Des Moines, 464 N.W.2d 236, 238 (Iowa 1990)
(citation omitted). The factors to consider when awarding reasonably
necessary attorney’s fees
“include the time necessarily spent, the nature and extent of
the service, the amount involved, the difficulty of handling and
importance of the issues, the responsibility assumed and
results obtained, the standing and experience of the attorney in
the profession, and the customary charges for similar service.
The district court must look at the whole picture and, using
independent judgment with the benefit of hindsight, decide on
a total fee appropriate for handling the complete case.”
Id. (citation omitted).
The arbitrator first reduced AGLW’s claim for attorney’s fees and costs
because the claimed fees and costs contained items that were incurred prior
to the arbitration, were unrelated to the arbitration, were excessive, or were
duplicative. This first adjustment is supported by substantial evidence and
represents the reasonably necessary attorney’s fees and costs AGLW
expended in defending itself in the arbitration proceeding and the district
court proceeding regarding Ales’ request for acceleration of the New Note.
We do agree, however, with the district court that substantial
evidence does not support the second reduction made by the arbitrator to
balance the fees and costs between the parties. The agreement states the
prevailing party is entitled to recover its attorney’s fees and costs. In
interpreting the agreement, the arbitrator had the authority to determine
what fees and costs were reasonably necessary and award that amount to
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the prevailing party. The evidence only supported the arbitrator’s reduction
of AGLW’s claimed fees and costs that were incurred prior to the arbitration,
were unrelated to the arbitration, were excessive, or were duplicative.
Accordingly, neither the agreement, the evidence, nor the reasonably
necessary standard for awarding attorney’s fees allowed the arbitrator to
balance the fees and costs between the parties. Consequently, we must
vacate that part of the arbitrator’s decision reducing the award of attorney’s
fees and costs to AGLW from $83,458.08 to $41,742.54.
V. Conclusion and Disposition.
Because substantial evidence supports the arbitration award
regarding Ales’ breach of the covenant not to compete and the damages
awarded for the breach, we affirm the decision of the district court on these
issues. We reverse the district court’s decision regarding the attorney’s fees
and costs award, confirm the arbitrator’s decision that the reasonably
necessary amount of the attorney’s fees and costs AGLW expended to
defend the arbitration and the district court case regarding Ales’ request for
acceleration of the New Note is $83,458.08, and vacate that portion of the
arbitrator’s award further reducing the fees and costs award to $41,742.54.
Ales claims if we vacate part of the arbitrator’s decision, we must
vacate the entire decision. We would agree with Ales if the portion of the
award vacated did not go to a distinct and severable part of the award. See
Superior Constr. Co. v. Bentley, 104 P.3d 331, 333 (Colo. Ct. App. 2004)
(finding where there is a discrete and severable part of the award, which is
identified as being beyond the arbitrator’s powers, this portion of the award
can be vacated and the rest affirmed). Here, where the attorney’s fees and
costs award is distinct and severable from the other portions of the award, a
court can vacate that portion of the award. See Gas Aggregation Servs., Inc.
v. Howard Avista Energy, LLC, 319 F.3d 1060, 1069 (8th Cir. 2003)
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(affirming the district court’s vacation of portions of the arbitrators’ award,
including the vacation of an award for attorney’s fees, where the arbitrators’
decision “evidenced a manifest disregard for [the] law”); Davis v. Prudential
Secs., Inc., 59 F.3d 1186, 1195 (11th Cir. 1995) (vacating the portion of the
district court’s confirmation of the arbitrators’ determination of attorney’s
fees).
Therefore, we remand the case to the district court for the court to
confirm the arbitration decision in all respects except for the arbitrator’s
reduction of the attorney’s fees and costs award from $83,458.08 to
$41,742.54. On remand the district court shall enter judgment confirming
the arbitrator’s finding that Ales breached the covenant not to compete and
the offsets of $145,650 against the New Note of as of September 17, 2002,
and $49,480.10 as of July 1, 2003. The district court shall also enter
judgment confirming that $83,458.08 is the reasonably necessary attorney’s
fees and costs expended by AGLW to defend the arbitration and the district
court case regarding Ales’ request for acceleration of the New Note. This
amount shall be offset against the New Note as of March 13, 2004, the date
of the arbitrator’s final award on fees and expenses. Finally, because AGLW
requested attorney’s fees and costs in its application to the district court
and on this appeal, the district court shall determine an additional award of
attorney’s fees and costs in favor of AGLW for AGLW’s fees and costs
incurred in the district court and in this appeal. Any additional attorney
fees and costs award shall be offset against the New Note. If any amount
determined by this court or the district court exceeds the amount due
under the New Note, the court shall enter an appropriate judgment against
Ales for the excess amount.
19
The costs of this matter are taxed to Ales.
AFFIRMED IN PART, REVERSED IN PART AND CASE REMANDED
WITH DIRECTIONS.
All justices concur except Ternus, C.J., and Appel, J., who take no
part.