Austin v. Austin

Decision Date30 April 2015
Docket NumberNo. 2 CA–CV 2014–0134.,2 CA–CV 2014–0134.
Citation237 Ariz. 201,348 P.3d 897,711 Ariz. Adv. Rep. 5
PartiesValer C. AUSTIN, Petitioner/Defendant/Appellee, Valerie A. Gordon, Defendant/Cross–Claimant/Appellee, Albert H. Gordon III, Defendant/Cross–Claimant/Appellee, v. Josiah T. AUSTIN, Respondent/Plaintiff/Cross–Defendant/Appellant.
CourtArizona Court of Appeals

DePasquale & Schmidt, PLC By Paul G. Schmidt and Mark DePasquale, Phoenix, The McCarthy Law Firm, P.L.L.C., By Kathleen A. McCarthy, Tucson, Counsel for Petitioner/Defendant/Appellee Valer C. Austin.

Snell & Wilmer L.L.P. By Kevin J. Parker, Phoenix, Counsel for Defendant/Cross–Claimant/Appellee Valerie A. Gordon.

Russell B. Stowers, PLLC By Russell B. Stowers, Tucson, Counsel for Defendant/Cross–Claimant/Appellee Albert H. Gordon III.

Gabroy, Rollman & Bossé, P.C. By Richard M. Rollman and Richard A. Brown, Tucson, Counsel for Respondent/Plaintiff/Cross–Defendant/Appellant Josiah T. Austin.

Presiding Judge MILLER authored the decision of the Court, in which Chief Judge ECKERSTROM and Judge ESPINOSA concurred.

OPINION

MILLER, Judge:

¶ 1 Josiah Austin appeals from the trial court's judgment denying his motion to compel arbitration. For the following reasons, we affirm.

Factual and Procedural Background

¶ 2 In reviewing a denial of a motion to compel arbitration, we must defer to the trial court's factual findings unless clearly erroneous. Harrington v. Pulte Home Corp., 211 Ariz. 241, ¶¶ 8, 16, 119 P.3d 1044, 1048, 1049–50 (App.2005). None of the parties directly challenges the court's factual findings under this standard.1 Given the complex nature of the underlying property transactions in the case before us, a detailed review of the factual background is necessary.

¶ 3 Josiah and Valer Austin were married in 1982. Valer has two children by a previous marriage (hereinafter “children”). Valer had inherited substantial property before her marriage to Josiah. Early in the marriage, Valer agreed to Josiah's management of a portion of her assets with the understanding that the majority of the assets would continue to be managed by third parties and monitored by Josiah.

¶ 4 Valer, in her estate planning, wished to ensure that certain of her property would be transferred to the children at specific future dates. Accordingly, in November 1987, Valer created two Grantor Retained Income Trusts (GRITs)2 for the benefit of her children. The Valer C. Austin Trust I dated November 19, 1987 (Valer GRIT) was created as an irrevocable trust for a period of 15 years, with the children designated as the beneficiaries, and was funded by Valer's separate property. The Josiah Austin Trust I dated December 17, 1987 (Josiah GRIT) was created as an irrevocable trust for a period of 20 years with the children designated as the beneficiaries. Although Josiah was shown as the grantor of the assets in the Josiah GRIT, those assets too were derived from Valer's separate property.

¶ 5 In 1996, Josiah was appointed trustee of the GRITs and, in 1997, El Coronado Holdings, LLC (ECH) was formed. The 1997 ECH operating agreement shows the initial members as Josiah, Valer, the Josiah GRIT, and the Valer GRIT. Directly pertinent provisions of the 1997 operating agreement include:

a. Josiah was designated as the sole manager with absolute, exclusive authority, power, and discretion to act on behalf of ECH, which provided Valer with no authority or control over the assets transferred into ECH.
b. Josiah's removal as manager required the affirmative vote of members holding two-thirds of the ownership interests, which, given the size of holding attributable to Josiah under the agreement, made it impossible for Valer or any other member to remove Josiah without his consent.
c. Withdrawal by a member constituted a breach of the 1997 operating agreement, permitting ECH to recover damages as an offset against any amount distributable to the withdrawing member. The amount of damages was determined in the Manager's sole discretion.
d. Josiah had the sole power to determine whether distributions would be made to members and, if so made, whether or not it would be distributed on a pro-rata basis.
e. All disputes among members were to be arbitrated if they could not be resolved through mediation.

¶ 6 Josiah and Valer signed the 1997 operating agreement in August 1997. Valer testified she had signed the 1997 operating agreement without reading it and without knowing it contained an arbitration provision. Josiah testified it was possible he only gave the signature page of the 1997 operating agreement to Valer and told her to sign it. Valer testified she had not seen the 1997 operating agreement before she signed it and it was her practice to trust her husband as to signing what he put in front of her. Valer was not advised about the operating agreement, its arbitration clause, or its effect on her rights or property.

¶ 7 In January 2000, Valer signed a document creating the Austin Family Revocable Trust. Valer was not advised that the family trust document might transmute her sole and separate property into community property, nor was she advised of the significant effects of transmuting sole and separate property to community property in the event of a divorce. The family trust document did not describe which assets would be transferred into that trust nor was Valer so advised. As of August 1997, the value of Valer's separate property brokerage account, which Josiah had transferred into ECH, was valued at approximately $58 million.

¶ 8 In April 2005, Josiah provided Valer with the signature page for an Amended and Restated Operating Agreement for ECH effective April 16, 2005 (2005 operating agreement). Valer was not provided the text of the rest of the 2005 operating agreement and signed it based on Josiah's direction. The 2005 operating agreement amended the members of ECH to include: the Austin Family Revocable Trust, the Josiah GRIT, and the Valer GRIT. In the 2005 operating agreement, Josiah was once again designated as the sole manager of ECH, and a vote of ninety percent of the ECH members was required to remove him as manager.

¶ 9 In November 2013, Valer filed a petition for dissolution of marriage from Josiah. Soon after, Valer moved for joinder of the children as additional parties necessary to resolve disputes regarding the management of ECH.3 In January 2014, Josiah filed a civil complaint against Valer and the children seeking to compel arbitration of the ECH dispute. The trial court granted Valer's motion to join the children as necessary parties as well as her motion to consolidate Josiah's civil case with the dissolution proceeding. In March 2014, the children filed a cross-claim against Josiah. In response, Josiah moved to compel the children to arbitrate their cross-claims.

¶ 10 After a two-day evidentiary hearing the trial court issued an under advisement ruling and signed order denying Josiah's motions to compel arbitration. Josiah timely filed this notice of appeal, and we have jurisdiction pursuant to A.R.S. § 12–2101.01(A)(1).

Valer's Claims

¶ 11 Josiah argues the trial court erred when it improperly applied the heightened standards of In re Harber's Estate, 104 Ariz. 79, 449 P.2d 7 (1969), instead of ordinary contract principles in its analysis of the arbitration agreement, as it concerned Valer and him. Our review of this issue is de novo. Smith v. Pinnamaneni, 227 Ariz. 170, ¶ 7, 254 P.3d 409, 412 (App.2011).

¶ 12 Although public policy supports arbitration agreements, [o]nly when the arbitration provision is enforceable will the court compel arbitration.’ WB, The Building Company, LLC v. El Destino, LP, 227 Ariz. 302, ¶ 11, 257 P.3d 1182, 1186 (App.2011), quoting Stevens/Leinweber/Sullens, Inc. v. Holm Dev. & Mgmt., Inc., 165 Ariz. 25, 30, 795 P.2d 1308, 1313 (App.1990) (alteration in WB ). An arbitration provision is not valid or enforceable where “a ground exists ... at law or in equity for the revocation of a contract.” A.R.S. § 12–3006(A). Generally, [l]egal or equitable grounds for revoking any contract include allegations that ‘the contract is void for lack of mutual consent, consideration or capacity or voidable for fraud, duress, lack of capacity, mistake or violation of a public purpose.’ Stevens/Leinweber/Sullens, 165 Ariz. at 28–29, 795 P.2d at 1311–12, quoting U.S. Insulation v. Hilro Const. Co., 146 Ariz. 250, 253, 705 P.2d 490, 493 (App.1985).

¶ 13 In Harber's Estate, a husband and wife entered into a postnuptial agreement, not incident to or in contemplation of separation or divorce, which provided all property not otherwise described therein was to become the sole property of husband. See 104 Ariz. at 84, 449 P.2d at 12. Our supreme court concluded that marital partners may “validly divide their property presently and prospectively by a post-nuptial agreement” but such an agreement must include built-in safeguards to ensure the agreement is “free from any taint of fraud, coercion or undue influence; that the wife acted with full knowledge of the property involved and her rights therein, and that the settlement was fair and equitable.” Id. at 88, 449 P.2d at 16. Accordingly, although “all contracts or agreements between husband and wife in Arizona are [not] presumptively void or fraudulent,” our supreme court held that spouses may enter a contract to divide their property outside a divorce or separation, but that when such a postnuptial agreement is

attacked by a wife on the grounds that the transaction was fraudulent or coerced, or is inequitable and unfair, the wife may have a judicial determination at that time whether the agreement is invalid as to her, and that it is the husband's burden to prove by clear and convincing evidence that the agreement was not fraudulent or coerced, or that it was not unfair or inequitable.[ 4 ]

Id.

¶ 14 We therefore examine whether the ECH operating agreement is a postnuptial agreement governed by the principles outlined in Harber's Estate. A postnuptial...

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