Collins v. D.R. Horton, Inc.

Decision Date24 September 2007
Docket NumberNo. 05-15737.,05-15737.
Citation505 F.3d 874
PartiesJulie E. COLLINS; Robert B. Ryan, individuals, Plaintiffs-Appellants, v. D.R. HORTON, INC., a Delaware corporation, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Lawrence Allen Katz, Bennett Evan Cooper, and Elizabeth A. Schallop Call, Steptoe & Johnson LLP, for plaintiffs-appellants Julie E. Collins and Robert B. Ryan.

Lonnie J. Williams, Jr. and Deanna R. Rader, Quarles & Brady Streich Lang LLP, for Defendant-Appellee D.R. Horton, Inc.

Appeal from the United States District Court for the District of Arizona; Roslyn O. Silver, District Judge, Presiding. D.C. No. CV-99-00330-ROS.

Before: DOROTHY W. NELSON, CONSUELO M. CALLAHAN, and CARLOS T. BEA, Circuit Judges.

BEA, Circuit Judge:

Julie E. Collins and Robert B. Ryan ("Appellants") appeal the district court's denial of their motion to vacate an arbitration award. Appellants contend their motion should have been granted because the arbitrators manifestly disregarded the law when deciding not to apply offensive non-mutual collateral estoppel1 because judicial review of an arbitration award under the Federal Arbitration Act ("FAA") is more limited than judicial review of a district court judgment. We hold the arbitrators did not manifestly disregard the law because no "well defined, explicit, and clearly applicable" law existed to be disregarded. Carter v. Health Net of Cal., Inc., 374 F.3d 830, 838 (9th Cir.2004). Accordingly, we affirm.

I.

Continental Homes Holding Corporation ("Continental") was a homebuilding and mortgage business headquartered in Arizona. In 1996, D.R. Horton, Inc. ("Horton"), a homebuilding company with operations in several states, expressed an interest in merging with Continental. Although Continental initially rebuffed Horton's merger proposals, Horton and Continental negotiated and entered into a merger agreement in 1997.

To make itself a more attractive merger partner, Continental entered into employment contracts with key employees designed to induce them to stay on with the merged company for at least that period of time sufficient to accomplish the merger and the related combination of operations. Among those Continental employees who entered into such employment contracts were Appellants and W. Thomas Hickcox ("Hickcox").2 The employment contracts provided for severance packages if Appellants or Hickcox were terminated without cause or resigned "for good reason," such as a significant reduction in responsibility.

During merger negotiations, an issue arose concerning whether Continental employees would be able to accelerate vesting of their unvested Continental stock options prior to or as part of the merger. Both Appellants and Hickcox contend Horton overcame this issue by verbally promising to give 30,000 shares of Horton stock to be divided by the group of Continental managers holding unvested Continental stock options, including Appellants and Hickcox.

The merger between Continental and Horton became effective in April 1998. Shortly after the merger, Horton terminated Hickcox without cause and Appellants resigned pursuant to the "for good reason" provisions in their employment contracts. Horton failed to honor the severance packages called for under both Appellants' and Hickcox's employment contracts. Appellants and Hickcox also contend Horton failed to honor its promise to give Continental's managers holding unvested Continental stock options 30,000 shares of Horton stock.

On February 22, 1999, Hickcox alone filed a diversity action against Horton in district court, alleging state law claims for breach of contract, failure to pay wages, promissory estoppel, and fraud. The same day, Appellants jointly filed a separate and distinct diversity action against Horton in the same district court, also alleging breach of contract, failure to pay wages, promissory estoppel, and fraud. Appellants and Hickcox made nearly identical breach of contract and fraud claims related to Horton's 30,000 share promise.

On May 14, 1999, pursuant to a mandatory arbitration clause in Hickcox's employment contract, Horton moved to dismiss Hickcox's case and compel arbitration. At the time, our precedent held that the FAA did not apply to employment contracts and, therefore, compulsory arbitration clauses in employment contracts were unenforceable.3 See Craft v. Campbell Soup Co., 177 F.3d 1083, 1093 (9th Cir.1999). The district court, therefore, denied Horton's motion to compel arbitration in Hickcox's case.

After discovery and unsuccessful summary judgment motions, Horton moved to consolidate Appellants' and Hickcox's cases for trial on the basis that both cases involved Horton's alleged 30,000 share promise. The district court denied the motion because the difference between Appellants' and Hickcox's employment contract claims, i.e., resignation for good cause versus termination without cause, outweighed the benefit of consolidation. Hickcox's and Appellants' trials were set for March 12, 2002 and May 14, 2002 respectively. On March 28, 2002, a jury found Horton liable for breaching the severance package provisions of Hickcox's employment contract and fraud as to the making of the 30,000 share promise. The jury awarded Hickcox $87,500 in compensatory damages on the breach of contract claim, $87,000 in damages on the fraud claim, and $4,100,000 in punitive damages, which the district court ordered remitted to $1,000,000 in punitive damages.

Prior to the start of Appellants' trial, the district court granted a motion by Horton to compel arbitration of Appellants' case because the Supreme Court had reversed our precedent and held that arbitration clauses in employment contracts are enforceable under the FAA. See Circuit City Stores, 532 U.S. at 114, 121 S.Ct. 1302.

Appellants' claims were arbitrated before a panel of three arbitrators. Appellants moved for summary judgment as to their 30,000 share claims, contending that offensive non-mutual collateral estoppel based on the judgment in Hickcox's case barred Horton from relitigating their 30,000 share claims. The arbitration panel denied Appellants' motion for summary judgment:

Although the argument for collateral estoppel to at least some issues might be compelling if this were an appealable proceeding in a court of law, the arbitrators conclude that collateral estoppel should not be applied in this binding arbitration. The reason is that an appeal is pending in the Hickcox matter, an appeal that we gather will not be resolved until well beyond the projected end of the current proceedings. We recognize that the pendency of—and possibility of reversal in—an appeal would not necessarily deprive a judgment of preclusive effect in a collateral proceeding in a court of law. There, the availability of an appeal of the second proceeding would permit the estoppel to be undone and the second judgment to be set aside if the prior judgment were ultimately reversed. Practicality and fairness suggest a different conclusion in this binding arbitration, however, in which the estoppel, if now ordered, cannot later be undone if the Hickcox judgment is later reversed. Such, in any event, is our understanding, and on the basis of that understanding we . . . deny [] the motion of Plaintiffs . . . that collateral estoppel be attributed in this matter to issues resolved against [Horton] . . . in the Hickcox case.

Thereafter, the arbitrators found for Appellants on their breach of employment contract claims. The arbitrators, however, found for Horton on Appellants' claims arising from Horton's alleged 30,000 share promise.

Pursuant to 9 U.S.C. § 9,4 Appellants filed in district court an application to vacate that portion of the arbitration award holding Appellants had "not established, either on grounds of breach of contract, promissory estoppel, or fraud, that Horton made an enforceable promise" to give 30,000 shares of Horton stock to Continental managers holding unvested Continental stock options. Appellants' application to vacate the arbitration award contended that the arbitrators displayed a manifest disregard for the law when deciding not to apply offensive non-mutual collateral estoppel to bar Horton from relitigating whether Horton made an enforceable 30,000 share promise.

The district court denied Appellants' application to vacate the arbitration award, holding that the arbitrators erred by not giving preclusive effect to Hickcox's judgment but that this error did not rise to the level of a manifest disregard for the law.

II.

We review de novo the district court's denial of Appellants' motion to vacate the arbitration award. See Woods v. Saturn Distrib. Corp., 78 F.3d 424, 427 (9th Cir.1996). Our review, however, is necessarily limited: "Broad judicial review of arbitration decisions could well jeopardize the very benefits of arbitration, [i.e., speed and informality,] rendering informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process." Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 998 (9th Cir.2003) (en banc).

Under 9 U.S.C. § 10, a district court may vacate an arbitration award only:

(1) where the award was procured by corruption, fraud or undue means; (2) where there was evident partiality or corruption on the part of the arbitrators; (3) where the arbitrators were guilty of misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C. § 10. Although § 10 does not sanction judicial review of the merits of arbitration awards, we have adopted a narrow "manifest disregard of the law" exception under which a procedurally proper arbitration award may be vacated. This standard was first articulated in dicta in Wilko v. Swan, 346...

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