ECO Box Fabricators v. Zweigle

2020 UT App 133THE UTAH COURT OF APPEALS
ECO BOX FABRICATORS LLC, RODNEY A. NEWMAN,
SUSAN MARTINDALE, AND THE SUSAN MARTINDALE LIVING TRUST,
Appellees,
v.
TORY R. ZWEIGLE,
Appellant.
Opinion
No. 20190278-CA
Filed September 24, 2020
Third District Court, Salt Lake Department
The Honorable Todd M. Shaughnessy
No. 180901221
J. Morgan Philpot, Attorney for Appellant
Heather M. Sneddon and Jared D. Scott,
Attorneys for Appellees
JUDGE DIANA HAGEN authored this Opinion, in which
JUDGES MICHELE M. CHRISTIANSEN FORSTER and JILL M. POHLMAN
concurred.
HAGEN, Judge:
¶1 Tory R. Zweigle appeals the district court’s denial of his
motion to vacate an arbitration award in favor of Eco Box
Fabricators LLC, Rodney A. Newman, Susan Martindale, and
the Susan Martindale Living Trust (collectively, Appellees).
Zweigle claims that the award should have been vacated
because the arbitrator exceeded his authority in several respects,
improperly applied Utah law to the parties’ claims, and awarded
unconstitutionally excessive punitive damages. He also claims
that the district court erroneously failed to hold a hearing on his
motion to vacate. We reject each of Zweigle’s arguments on
appeal and affirm the district court’s order. We also award
Eco Box Fabricators v. Zweigle
attorney fees requested by Appellees for their defense of this
appeal and remand to the district court for calculation of fees
reasonably incurred.
BACKGROUND
¶2 In 2017, Zweigle and Newman formed Eco Box
Fabricators LLC to manufacture shipping container housing
units. Zweigle and Newman executed a limited liability
company agreement under which Newman would invest
$695,000 in cash and Zweigle would contribute non-monetary
assets, namely his purported expertise and experience in
manufacturing shipping container housing. Specifically, Zweigle
claimed to have spent several years designing shipping
container homes, paying architects to create drawings of his
designs, sending these drawings to a manufacturer in China, and
eventually selling the homes to Chinese customers.
¶3 A few months after the formation of Eco Box, Susan
Martindale, a friend of Newman, purchased a 20% share in the
company. Zweigle, Newman, and Martindale executed an
amended limited liability company agreement (the LLC
Agreement), and Martindale deposited $300,000 into Eco Box’s
account. The LLC Agreement contained an arbitration provision
directing the parties to engage in binding arbitration to settle
“any controversy, dispute or claim arising out of or in
connection with or relating to” the LLC Agreement. It also
contained a dispute resolution provision, which provided that
before arbitration, managers must first engage a designated
business consultant and then initiate mediation.
¶4 Newman and Martindale soon discovered that Zweigle
had misrepresented aspects of his prior experience and
fraudulently obtained funds from Eco Box for his personal use.
They initiated litigation and voted to remove Zweigle from Eco
Box. In response, Zweigle filed a motion to compel arbitration,
20190278-CA 2 2020 UT App 133Eco Box Fabricators v. Zweigle
arguing that the LLC Agreement required the parties to engage
in the specified dispute resolution process, including mediation
and binding arbitration. Appellees filed an arbitration demand
and responded to Zweigle’s motion to compel arbitration,
agreeing that the majority of the claims should be decided by
arbitration but arguing that at least some of them fell outside the
scope of the arbitration clause in the LLC Agreement. Zweigle
responded by seeking to withdraw his motion to compel
arbitration, stating he now expressly “reject[ed] arbitration.” He
then filed an answer, third-party complaint, and counterclaims.
¶5 Eventually, the parties agreed to arbitrate their claims and
reached a stipulation regarding the scope of the arbitration (the
Stipulated Arbitration Agreement). Appellees’ counsel sent the
stipulation to Zweigle’s counsel via email, the relevant portion of
the stipulation reading as follows:
The parties have agreed that the AAA arbitration
will proceed with respect to all claims between Rod
Newman, Tory Zweigle, Susan Martindale, the
Susan Martindale Living Trust, and Eco Box
Fabricators, LLC. . . .
Mr. Zweigle hereby withdraws all objections to the
arbitration with respect to the foregoing parties
and the claims between them.
Zweigle’s counsel confirmed that the Stipulated Arbitration
Agreement was accurately represented by Appellees’ email.
¶6 The parties began the arbitration process, which
culminated in a final arbitration hearing in September 2018. On
October 5, 2018, the arbitrator issued an interim award in favor
of Appellees. Specifically, the arbitrator concluded that Zweigle
fraudulently induced Appellees to enter into the LLC Agreement
by lying about his previous experience in the business. The
arbitrator noted that there was no evidence showing Zweigle
20190278-CA 3 2020 UT App 133Eco Box Fabricators v. Zweigle
had any previous experience designing and manufacturing
shipping container housing. The arbitrator also determined that
Zweigle had materially breached the LLC Agreement and
committed fraud by obtaining funds from the business that he
used for personal expenses. The arbitrator ultimately concluded
that a “pattern of willful misrepresentation and defiance of
important fiduciary duties was abundantly clear.” He awarded
Appellees $403,894.52 in damages and $500,000 in punitive
damages and ordered rescission of the LLC Agreement. He later
awarded attorney fees and costs.
¶7 Appellees filed a motion with the district court to affirm
the arbitration award. Zweigle did not file an opposition to that
motion, but instead filed a motion to vacate the award. In his
motion, Zweigle requested a hearing pursuant to rule 7(h) of the
Utah Rules of Civil Procedure. Appellees opposed this motion.
Without holding a hearing, on March 1, 2019, the district court
denied Zweigle’s motion to vacate and granted Appellees’
motion to affirm the arbitration award. The court entered
judgment against Zweigle and awarded Appellees the attorney
fees they had incurred since the entry of the final arbitration
award. Zweigle now appeals.
ISSUES AND STANDARDS OF REVIEW
¶8 On appeal, Zweigle first contends that the district court
erred by not holding a hearing under rule 7(h) of the Utah Rules
of Civil Procedure on his motion to vacate the arbitration award.
“We review the district court’s interpretation and application of
the rules of civil procedure for correctness and will reverse only
if the appellant shows error that was substantial and
prejudicial.” Conner v. Department of Com., 2019 UT App 91, ¶ 15,
443 P.3d 1250 (cleaned up).
¶9 Next, Zweigle contends that the district court erred in
denying his motion to vacate the arbitration award. “In
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reviewing the order of a [district] 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.” Evans v. Nielsen, 2015 UT
App 65, ¶ 7, 347 P.3d 32 (cleaned up).
ANALYSIS
I. Failure to Hold Hearing
¶10 Zweigle first challenges the district court’s decision not to
hold a hearing on his motion to vacate. Zweigle contends that
the court’s refusal was improper under rule 7(h) of the Utah
Rules of Civil Procedure and violated his due process rights.
Rule 7(h) states that the court “must grant a request for a hearing
on . . . a motion that would dispose of the action or any claim or
defense in the action unless the court finds that the motion or
opposition to the motion is frivolous or the issue has been
authoritatively decided.” Utah R. Civ. P. 7(h). Assuming,
without deciding, that rule 7(h) applies to a motion to vacate an
arbitration award, we conclude Zweigle has failed to
demonstrate that the failure to hold a hearing was a substantial
and prejudicial error.
¶11 Zweigle “has the burden to show not only that the error
occurred but also that it was substantial and prejudicial.” See
Stevenett v. Wal-Mart Stores, Inc., 1999 UT App 80, ¶ 8, 977 P.2d
508. To show the error was substantial and prejudicial, Zweigle
must demonstrate that “there is at least a reasonable likelihood
that in the absence of the error the result would have been
different.” Ross v. Epic Eng’g PC, 2013 UT App 136, ¶ 12, 307 P.3d
576 (cleaned up). However, Zweigle has not pointed to any
evidence that he would have sought to admit had the court held
an evidentiary hearing or explained how oral argument would
have changed the outcome. Instead, Zweigle simply contends
20190278-CA 5 2020 UT App 133Eco Box Fabricators v. Zweigle
that the failure to hold a hearing “materially prejudiced” him
because the court “glossed over” both “disputed facts (i.e.
whether an email from Mr. Zweigle’s counsel waived or
modified the terms of the parties[’] arbitration agreement)” and
“disputed legal issues (i.e. the statutory authority of an
arbitrator, and the jurisdiction of the arbitrator in this matter).”
But these very arguments were made in Zweigle’s written
memorandum in support of his motion to vacate and were
rejected by the district court when it denied the motion. He has
not demonstrated that, had the court held a hearing, there is a
reasonable likelihood that the outcome would have been
different. Therefore, any error in not holding a hearing was
harmless.
II. Grounds for Vacating Award
¶12 Next, Zweigle argues that the district court erred in
failing to vacate the arbitration award on various grounds. The
arbitration process in Utah is governed by the Utah Uniform
Arbitration Act (the Act). The Act “reflects long-standing public
policy favoring speedy and inexpensive methods of adjudicating
disputes.” Allred v. Educators Mutual Ins. Ass’n of Utah, 909 P.2d
1263, 1265 (Utah 1996). Thus, when a district court reviews an
arbitration award, its standard of review “is an extremely
narrow one giving considerable leeway to the arbitrator.”
Softsolutions, Inc. v. Brigham Young Univ., 2000 UT 46, ¶ 10, 1 P.3d
1095. “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. (cleaned up).
¶13 “Given the public policy and law in support of
arbitration, judicial review of arbitration awards . . . is limited to
those grounds and procedures provided for under the Act.”
Allred, 909 P.2d at 1265. The grounds for vacating an arbitration
award are limited to the following circumstances: (a) “the award
was procured by corruption, fraud, or other undue means”;
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(b) the arbitrator showed partiality or corruption or was guilty of
prejudicial misconduct; (c) the arbitrator refused to postpone a
hearing, hear material evidence, or otherwise conduct a hearing
pursuant to the Act, to the substantial prejudice of the rights of a
party; (d) the arbitrator exceeded his or her authority; (e) “there
was no agreement to arbitrate”; or (f) “the arbitration was
conducted without proper notice . . . so as to substantially
prejudice the rights of a party.” Utah Code Ann. § 78B-11-124(1)
(LexisNexis 2018). A party seeking to vacate an arbitration
award has the burden to point the court to which statutory
ground justifies setting aside the award. See Allred, 909 P.2d at
1267 (affirming the district court’s order denying a motion to
vacate because the moving party “failed to challenge the validity
of the arbitration of his claim in the manner prescribed by the
Act or under any of the statutorily recognized grounds for
vacating the arbitration award”); see also Youngs v. American
Nutrition, Inc., 537 F.3d 1135, 1141 (10th Cir. 2008) (“The burden
is on the party seeking to vacate an arbitration award . . . to show
that one of the limited statutory grounds exists for setting aside
the arbitration result.”).
¶14 Zweigle argues that the district court erred in denying his
motion to vacate the arbitration award on six grounds. He
characterizes the first four grounds as instances of the arbitrator
exceeding his authority under section 78B-11-124(1)(d). First, he
asserts that there was no agreement to arbitrate issues that had
not been subject to the dispute resolution process outlined in the
LLC Agreement. Second, he argues that because Eco Box was not
a party to the LLC Agreement, the arbitrator exceeded his
authority by resolving claims brought by Eco Box. Third, he
claims that equitable rescission of the LLC Agreement was an
improper remedy imposed by the arbitrator. Fourth, he argues
that the arbitrator failed to consider his claims for breach of
contract and declaratory relief. The district court rejected each of
these arguments, concluding that Zweigle had “agreed to the
scope of the arbitration proceeding.” We agree with the district
20190278-CA 7 2020 UT App 133Eco Box Fabricators v. Zweigle
court that the terms of the Stipulated Arbitration Agreement
resolve each of these four claims.
¶15 Zweigle initially takes issue with the arbitrator’s
resolution of claims that were not first subject to the formal
dispute resolution process outlined in the LLC Agreement. He
argues that the LLC Agreement expressly states that “arbitration
is not agreed to or authorized on any claim until the ‘dispute
resolution’ provisions . . . are followed.” Zweigle correctly notes
that he initially objected to arbitration on the basis that the
prerequisite dispute resolution steps in the LLC Agreement had
not been satisfied. But when he later stipulated to arbitrate all
claims between the parties, he expressly withdrew any
objections to arbitration, which necessarily included his claim
that the arbitration was not authorized by the terms of the LLC
Agreement. Based on the Stipulated Arbitration Agreement, the
arbitrator had authority to resolve all claims, notwithstanding
any limitations in the LLC Agreement.
¶16 Second, Zweigle claims that the arbitrator “exceeded his
authority by resolving claims by [Eco Box] because [Eco Box] is
not a party to the arbitration agreement.” He claims that because
there was “no agreement, in writing or otherwise, that defines
the terms or scope of arbitration available to Eco Box,” the
“arbitrator was prohibited from considering Eco Box claims.”
Again, Zweigle’s argument fails because the scope of the
arbitrator’s authority was based on the Stipulated Arbitration
Agreement and was not limited by the terms of the LLC
Agreement. The Stipulated Arbitration Agreement clearly stated
that the parties agreed to arbitrate “all claims” between the
parties, including “Eco Box Fabricators, LLC.”
¶17 Third, Zweigle argues that the arbitrator exceeded his
authority by imposing equitable rescission of the LLC
Agreement as a remedy, because equitable rescission “was not
part of any claim submitted by [Appellees],” and therefore was
20190278-CA 8 2020 UT App 133Eco Box Fabricators v. Zweigle
outside the scope of the Stipulated Arbitration Agreement.
Arbitrators have wide latitude to fashion remedies pursuant to
the Act. Under Utah Code section 78B-11-122, an arbitrator has
the authority to “order any remedies as the arbitrator considers
just and appropriate under the circumstances of the arbitration
proceeding,” and the “fact that a remedy could not or would not
be granted by the court is not a ground for refusing to
confirm . . . or for vacating an award.” Utah Code Ann. § 78B-11-
122(3) (LexisNexis 2018). Here, the arbitrator ordered rescission
of the contract after finding that Zweigle had fraudulently
induced Newman and Martindale to enter into the LLC
Agreement. Even if Appellees had not specifically requested
rescission prior to the parties entering into the Stipulated
Arbitration Agreement, the arbitrator did not exceed his
authority in his choice of remedy.
¶18 Fourth, Zweigle argues that the arbitrator failed to
consider all the claims between the parties. Specifically, Zweigle
claims that the arbitrator ignored his breach of contract and
declaratory relief claims, which were based on the argument
“that the dispute resolution process required by the parties’
written agreement had not been followed and therefore there
was no basis to move forward with arbitration.” Zweigle
contends that, in agreeing to the Stipulated Arbitration
Agreement, he “was expressly agreeing to arbitrate—so long as
all claims [were considered]—including his claim that none of
the Appellees’ claims were authorized for arbitration unless and
until they complied with the dispute resolution process”
outlined in the LLC Agreement. But the Stipulated Arbitration
Agreement contained no such caveat. Instead, Zweigle
“withdrew all objections to the arbitration with respect to the
foregoing parties and the claims between them,” effectively
waiving any breach of contract or declaratory relief claim based
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on failure to follow the dispute resolution process outlined in the
LLC Agreement. 1
¶19 Zweigle makes two additional arguments on appeal that
do not appear to be based on the scope of the arbitrator’s
authority. First, he argues that the arbitrator erred by applying
Utah law when the LLC Agreement designated the application
of Delaware law. Second, he claims that the punitive damages
awarded by the arbitrator were unconstitutionally excessive. But
Zweigle has not explained how these arguments fit within the
limited statutory grounds for vacating an arbitration award.
¶20 The moving party has the burden of establishing a
recognized statutory ground for vacating an arbitration award.
See Utah Code Ann. § 78B-11-124; see also Allred v. Educators
Mutual Ins. Ass’n of Utah, 909 P.2d 1263, 1267 (Utah 1996). The
district court rejected Zweigle’s remaining arguments because
Zweigle failed to invoke any applicable statutory ground.
Specifically, the district court ruled that “none of [his] other
arguments concerning the conduct of the arbitrator or the
proceeding are grounds for vacating the arbitrator’s decision.”
Yet, on appeal, Zweigle does not address the district court’s
reasoning, nor does he attempt to identify the statutory grounds
on which these arguments are based. See Bad Ass Coffee Co. of
Hawaii Inc. v. Royal Aloha Int’l LLC, 2020 UT App 122, ¶ 55
(rejecting the appellees’ argument because they failed to
“address the district court’s reasoning and explain why it was
1. To the extent that Zweigle claims that the arbitrator refused to
address any other claims, such a contention is not borne out by
the record. In the award, the arbitrator addressed “all other
claims,” stating that he did not “see any path for recovery by
[Zweigle] and . . . considered and rejected each theory of liability
and each counterclaim.” He stated that “[a]ll claims not
addressed herein are denied.”
20190278-CA 10 2020 UT App 133Eco Box Fabricators v. Zweigle
wrong in their opening brief”). Accordingly, Zweigle has not
established any grounds for reversing the district court’s order
denying his motion to vacate the arbitration award.
III. Attorney Fees
¶21 Appellees request an award of the attorney fees incurred
in defending this appeal. “When a party who received attorney
fees below prevails on appeal, the party is also entitled to fees
reasonably incurred on appeal.” Telegraph Tower LLC v. Century
Mortgage LLC, 2016 UT App 102, ¶ 52, 376 P.3d 333 (cleaned up).
Because Appellees were awarded attorney fees by the district
court, they are entitled to fees as the prevailing party on appeal. 2
CONCLUSION
¶22 We conclude that the district court did not err in refusing
to vacate the arbitration award on the various grounds asserted
by Zweigle. Further, we conclude that any error in refusing to
hold a hearing pursuant to rule 7(h) of the Utah Rules of Civil
Procedure was harmless. We therefore affirm the court’s ruling
confirming the arbitration award. As the prevailing party,
Appellees are entitled to recover their attorney fees on appeal,
and we remand to the district court to calculate the amount of
attorney fees reasonably incurred.
2. Appellees also request an award of attorney fees against “both
Zweigle and his counsel, jointly and severally,” under rule 33 of
the Utah Rules of Appellate Procedure. However, “damage
awards under rule 33 are reserved only for egregious cases,”
Redden v. Redden, 2020 UT App 22, ¶ 42 n.5, 461 P.3d 314 (cleaned
up), and we do not consider this to be an egregious case.
20190278-CA 11 2020 UT App 133