Hamblen v. Hatch

• Decision Date: 21 July 2017
• Docket Number: No. CV-16-0260-PR,CV-16-0260-PR
• Citation: 398 P.3d 99
• Parties: Jeffrey HAMBLEN and Barbara Youngs, husband and wife, Petitioners, v. Hon. Ralph HATCH, Judge of the Superior Court of the State of Arizona, in and for the County of Navajo, Respondent Judge, Winslow Memorial Hospital, Inc., d/b/a Little Colorado Medical Center, Real Party in Interest.
• Court: Arizona Supreme Court

398 P.3d 99

Jeffrey HAMBLEN and Barbara Youngs, husband and wife, Petitioners,

v. Hon. Ralph HATCH, Judge of the Superior Court of the State of Arizona, in and for the County of Navajo, Respondent Judge,Winslow Memorial Hospital, Inc., d/b/a Little Colorado Medical Center, Real Party in Interest.

No. CV-16-0260-PR

Supreme Court of Arizona.

Filed July 21, 2017

Scott W. Rodgers (argued), Thomas L. Hudson, Joshua D. Bendor, Osborn Maledon, P.A., Phoenix, Attorneys for Jeffrey Hamblen and Barbara Youngs

Randall Yavitz, Isabel M. Humphrey (argued), Hunter, Humphrey & Yavitz, PLC, Phoenix; and James E. Ledbetter, Jared R. Owens, The Ledbetter Law Firm, P.L.C., Cottonwood, Attorneys for Winslow Memorial Hospital Inc.VICE CHIEF JUSTICE PELANDER authored the opinion of the Court, in which CHIEF JUSTICE BALES, JUSTICES BRUTINEL, TIMMER, BOLICK, and LOPEZ, and JUDGE GURTLER^* joined.

VICE CHIEF JUSTICE PELANDER, opinion of the Court:

¶ 1 In this employment dispute, the parties submitted their respective claims to mandatory arbitration under their employment contract's broad arbitration provision, which neither side challenged. The arbitrator ruled in favor of the employer, concluding that it properly rescinded the contract based on the employee's underlying misrepresentations and omissions. The final arbitration award, which the superior court later confirmed at the employer's request, fully settled all claims and counterclaims submitted to arbitration and denied all claims not expressly granted in the award. Applying the "separability" doctrine, we hold that the employer, having not specifically challenged the contract's arbitration provision, may not litigate in this action claims against the employee that, at the least, were permissive counterclaims in the arbitration.

I.

¶ 2 Winslow Memorial Hospital, Inc., doing business as Little Colorado Medical Center ("LCMC"), is a nonprofit corporation that operates a hospital in Winslow. In 2003, LCMC hired Jeffrey Hamblen as its president and CEO. Before he was hired, Hamblen misrepresented two aspects of his prior employment with another entity with which LCMC had a management services agreement. First, Hamblen falsely told LCMC that he would not receive any severance payments from the other entity. And second, Hamblen failed to disclose an amendment to the management services agreement that required LCMC to reimburse the other entity for the severance payments it made to Hamblen.

¶ 3 The 2013 Hamblen/LCMC employment contract included this arbitration provision:

Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules ... and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

....

All counterclaims that would be compulsory or permissive under Federal Rule of Civil Procedure 13(a) and (b) if the claim were filed in court shall be asserted in the arbitration and not otherwise.

¶ 4 In early 2014, after learning that Hamblen was receiving severance payments for which it was obligated to reimburse the other entity, LCMC placed Hamblen on administrative leave. Hamblen then notified LCMC that he was terminating the employment contract, alleging "good reason" under that agreement. LCMC in turn notified Hamblen that it was rescinding the employment contract or, alternatively, terminating him for cause. Hamblen then filed an arbitration demand with the American Arbitration Association, claiming that LCMC owed him severance pay under the contract on the ground that he had "good reason" to terminate it. Shortly thereafter, LCMC filed this action in superior court, alleging an unjust enrichment claim against Hamblen.

¶ 5 Hamblen moved to compel arbitration, arguing that LCMC's claim was subject to the employment contract's arbitration provision. LCMC opposed the motion on several grounds, including its contention that it was entitled to rescind the employment contract because of Hamblen's fraudulent misrepresentations and omissions. Despite that argument, the superior court granted the motion and stayed the case "until mandatory arbitration under the contract is completed."

¶ 6 The parties then engaged in extensive prehearing disclosures and preparation for the arbitration. LCMC asserted various counterclaims, including its claim for unjust enrichment. (Although LCMC continued to pursue its unjust enrichment counterclaim at the arbitration hearing, it purportedly withdrew that claim in a post-hearing memorandum to the arbitrator.) LCMC also sought rescission of the employment contract based on Hamblen's fraudulent misrepresentations and omissions. LCMC did not, however, challenge the arbitration clause itself (as opposed to the entire employment contract). The parties then participated in a multi-day arbitration hearing.

¶ 7 In October 2015, the arbitrator entered his award: (a) denying Hamblen's claim for severance pay because he terminated the agreement without "good reason"; and (b) ruling that "LCMC had grounds to rescind, and did rescind," the employment contract based on Hamblen's misrepresentations and omissions, which "abrogates the agreement and undoes it from the beginning." The award also provided that "[t]his Final Award is in full settlement of all claims and counterclaims submitted to this Arbitration," and that "[a]ll claims not expressly granted herein are hereby denied."

¶ 8 Following the arbitration process, LCMC moved in superior court to confirm the final award. LCMC also asked the court to lift the stay to allow LCMC to seek damages from Hamblen for various claims LCMC asserted, or could have asserted, in the arbitration, including its unjust enrichment claim that the court had previously ordered LCMC to arbitrate. Hamblen did not oppose confirmation of the award, but did oppose the rest of LCMC's request and urged the court to enter a "simple judgment in LCMC's favor, with no monetary award for any party," consistent with the arbitration award's language.

¶ 9 In February 2016, the superior court entered judgment confirming the arbitration award but also lifting the stay and granting LCMC leave to amend its complaint. The court acknowledged Hamblen's argument that, based on the arbitration proceedings and final award, LCMC should be foreclosed from reasserting its counterclaims in this action. But the court rejected that argument, noting that the arbitrator found that LCMC had "grounds to and did rescind the LCMC/Hamblen Employment Agreement," which "abrogate[d] the agreement and undid it from its very beginning." Consequently, the court ruled, Hamblen's request "to deny [LCMC's] right to a jury trial to prove damages" on its claims "is unreasonable as the contract was rescinded and undid [sic ] from its very beginning."

¶ 10 Hamblen later moved for a new trial or, alternatively, to alter or amend the judgment under Arizona Rule of Civil Procedure 59. He argued that the arbitration award disposed of all claims between the parties—including LCMC's counterclaims—and that the court overstepped its authority under the Revised Uniform Arbitration Act ("RUAA"), A.R.S. § 12–3001 to –3029, by ruling that LCMC could reassert its counterclaims in this court action. LCMC, in turn, moved to amend its complaint to assert various claims against Hamblen.

¶ 11 In April 2016, the superior court denied Hamblen's motions, ruling that (1) both parties jointly requested the court to confirm the arbitration award, and that "the Court did in fact confirm the final arbitration award by written order"; and (2) because LCMC rescinded the employment contract, which " ‘undoes it from the beginning,’ " LCMC was "entitled to a jury trial on its claims." By separate order, the court also granted LCMC's motion to amend its complaint.

¶ 12 The court of appeals declined jurisdiction of Hamblen's ensuing special action. We granted review because the case presents an issue of statewide importance and first impression before this Court—whether the separability doctrine applies to post-arbitration confirmation proceedings and precludes court litigation of arbitrable claims when the agreement's arbitration provision was not specifically challenged, even though the arbitrator finds grounds for rescinding the entire agreement. We have jurisdiction under article 6, section 5(3) of the Arizona Constitution and A.R.S. § 12–120.24.

II.

¶ 13 Fifty years ago, the United States Supreme Court adopted what became known as the "separability" doctrine in the arbitration context. Prima Paint Corp. v. Flood & Conklin Mfg. Co. , 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). The issue there was whether the federal court or an arbitrator should resolve a claim of fraud in the inducement of a contract providing for arbitration. Id. at 397–98, 402, 87 S.Ct. 1801. Applying the applicable Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 – 16, the Court held that "if the claim is fraud in the inducement of the arbitration clause itself—an issue which goes to the ‘making’ of the agreement to arbitrate—the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally." Id. at 403–04, 87 S.Ct. 1801.

¶ 14 More recently, the Supreme Court affirmed and applied the Prima Paint rule when the parties' contract contained an arbitration clause, but a party opposed arbitration and sought to litigate in federal court her claim of unconscionability under state law. Rent–A–Center, West, Inc. v. Jackson , 561 U.S. 63, 65–66, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010). Rejecting that position, the Court ruled that one may prevent arbitration of claims within the arbitration agreement's scope only if he or she "challenges specifically the validity of the agreement to arbitrate," rather than "challeng [ing] the contract as a...