Duke v. Graham

• Decision Date: 30 March 2007
• Docket Number: No. 20051036.,20051036.
• Citation: 2007 UT 31,158 P.3d 540
• Parties: Ted DUKE, an individual, and Maria Del Carmen Zavala Cardenas, an individual, Plaintiffs and Appellants, v. Randal GRAHAM, an individual, David Graham, an individual, and Craig R. Mariger, in his capacity as purported arbitrator herein, Defendants and Appellees.
• Court: Utah Supreme Court

158 P.3d 540

2007 UT 31

Ted DUKE, an individual, and Maria Del Carmen Zavala Cardenas, an individual, Plaintiffs and Appellants, v. Randal GRAHAM, an individual, David Graham, an individual, and Craig R. Mariger, in his capacity as purported arbitrator herein, Defendants and Appellees.

No. 20051036.

Supreme Court of Utah.

March 30, 2007.

Nick J. Colessides, John Martinez, Salt Lake City, for plaintiffs.

David R. Williams, Anthony M. Grover, Salt Lake City, for defendants.

PARRISH, Justice:

INTRODUCTION

¶ 1 The principal question presented by this appeal is whether a member or manager of a limited liability company may be removed through binding arbitration. We answer the question in the affirmative. Although Utah Code sections 48-2c-710(3) and 48-2c-809(1) provide for judicial removal of members and managers of limited liability companies, the legislature did not forbid removal through other means. Additionally, even though the Utah Constitution guarantees Utah citizens their day in court, it does not prevent individuals from bargaining away their rights to judicial proceedings through arbitration agreements.

BACKGROUND

¶ 2 Ted Duke ("Duke"), Maria Del Carmen Zavala Cardenas ("Cardenas"), Randal Graham, and David Graham all executed an operating agreement for the limited liability company "Way Cool Dirt Cheap, LLC" ("WCDC"). These four individuals became members of the LLC, while Duke and Randal Graham were also designated as managers. The operating agreement provides for arbitration in the event of a dispute among the members.

¶ 3 Soon after the signing of the operating agreement, a conflict arose between Duke and Cardenas on one side and the Grahams on the other. The Grahams alleged that Duke and Cardenas used WCDC assets to create a competing company, Original Way Cool Dirt Cheap. The Grahams notified Duke and Cardenas of their intent to submit the dispute to arbitration, after which Duke and Cardenas filed suit to enjoin the arbitration. The district court eventually ordered the parties to submit to arbitration. Following several evidentiary hearings and oral arguments, the arbitrator issued an award removing Duke and Cardenas as members of WCDC by virtue of Utah Code section 48-2c-710(3)(a) and (c). Although the award itself did not explicitly address the issue, the arbitrator's written comments implicitly revealed the intent to remove Duke as a manager of WCDC.

¶ 4 After the award was issued, the Grahams petitioned the district court to enter a judgment confirming the arbitration award, and Duke and Cardenas moved to vacate it, arguing that the arbitrator had exceeded his authority by expelling Duke and Cardenas as members and Duke as a manager of WCDC. Specifically, Duke and Cardenas asserted that Utah Code sections 48-2c-710(3) and 48-2c-809(1) provide that only a court may remove members and managers of an LLC. Additionally, Duke and Cardenas argued that under the due process and open courts provisions of the Utah Constitution, they cannot be deprived of their property rights to membership and management of an LLC without their "day in court." The district court rejected these arguments and confirmed the arbitration award.

¶ 5 Duke and Cardenas now appeal to this court. They argue that the arbitrator exceeded his authority and that the district court therefore erred in confirming the award.

STANDARD OF REVIEW

¶ 6 In reviewing the district court's judgment affirming the arbitration award, this court must apply two independent standards of review. The first is the standard of review applicable to this court's review of the district court's proceedings. The second is the standard applicable to the district court's review of the arbitration award. Buzas Baseball, Inc. v. Salt Lake Trappers, Inc., 925 P.2d 941, 947 (Utah 1996).

¶ 7 Our review of the district court's ruling involves statutory and constitutional interpretation, both of which involve conclusions of law that we review for correctness granting no deference to the district court. E.g., MacFarlane v. State Tax Comm'n, 2006 UT 18, ¶ 9, 134 P.3d 1116 (statutory interpretation); Grand County v. Emery County, 2002 UT 57, ¶ 6, 52 P.3d 1148 (Utah constitutional interpretation).

¶ 8 A district court's review of an arbitration award should be narrowly confined to those grounds established by statute. Intermountain Power Agency v. Union Pac. R.R. Co., 961 P.2d 320, 322-23 (Utah 1998); Pac. Dev., L.C. v. Orton, 2001 UT 36, ¶ 6, 23 P.3d 1035. Utah's Arbitration Act provides that a district court shall vacate an arbitration award when "an arbitrator exceeded the arbitrator's authority." Utah Code Ann. § 78-31a-124(1)(d) (2002). In interpreting the similarly worded predecessor to this provision,¹ we have recognized two situations where a district court may find that an arbitrator has exceeded her authority. The first is when the district court determines that an "arbitrator's award covers areas not contemplated by the submission agreement."² Buzas Baseball, 925 P.2d at 949; accord Softsolutions, Inc. v. Brigham Young Univ., 2000 UT 46, ¶ 15, 1 P.3d 1095. The second is when the district court finds that the award is "`without foundation in reason or fact.'" Buzas Baseball, 925 P.2d at 950 (quoting Brotherhood of R.R. Trainmen v. Cent. of Ga. Ry. Co., 415 F.2d 403, 411-12 (5th Cir. 1969)); accord Softsolutions, 2000 UT 46, ¶ 15, 1 P.3d 1095.

¶ 9 Although this court has previously identified only two situations in which an arbitrator may be found to have exceeded her authority, we have never stated that this list is exhaustive. Duke and Cardenas have argued for two additional scenarios in which a district court should invalidate an arbitration award for exceeding the proper bounds of the arbitrator's authority under Utah Code section 78-31a-124(1)(d).

¶ 10 First, Duke and Cardenas argue that the legislature has stripped arbitrators of the authority to remove members and managers of LLCs under Utah Code sections 48-2c-710(3) and 48-2c-809(1). Because the legislature has granted arbitrators the authority to make binding adjudications of controversies under the Utah Uniform Arbitration Act, Utah Code Ann. §§ 78-31a-101 to -131 (2002 & Supp.2006), it is fully within the legislature's power to limit an arbitrator's authority to resolve certain issues. Thus, an arbitrator's attempt to resolve issues forbidden by statute would fit squarely within the plain meaning of Utah Code section 78-31a-124(1)(d), which prohibits arbitrators from exceeding their authority.

¶ 11 Duke and Cardenas also argue that the Utah Constitution forbids removing members and managers of LLCs without a judicial proceeding. As we have noted above, arbitrators receive their authority to adjudicate claims from the legislature. Id. §§ 78-31a-101 to -131. In turn, the legislature's authority to enact laws is limited by the Utah Constitution. State ex rel. Breeden v. Lewis, 26 Utah 120, 72 P. 388, 389 (1903). It therefore follows that the legislature cannot invest an arbitrator with authority to do indirectly what it could not do directly under the Utah Constitution. Accordingly, an arbitration award that violates a provision of the Utah Constitution would also exceed the arbitrator's authority.

¶ 12 Because Duke and Cardenas' arguments fall within one of the specific statutory grounds for district court review of an arbitration award, and because this court does not cede any deference to the district court's conclusions of law, we review de novo the question of whether the arbitrator exceeded his authority.

ANALYSIS

¶ 13 Duke and Cardenas present three main challenges to the arbitrator's award, claiming that (1) Utah Code sections 48-2c-710(3) and 48-2c-809(1) forbid the removal of a member or manager of a limited liability company absent a judicial determination; (2) the due process and open courts provisions of the Utah Constitution forbid the removal of a member or manager of a limited liability company absent a judicial determination; and (3) the arbitration award was invalid because it contained no findings in support of the award. Duke and Cardenas also seek an award of attorney fees, costs, and interest, and the Grahams similarly seek an award of their fees and costs associated with this appeal. We address each of these arguments in turn.

I. STATUTORY INTERPRETATION OF UTAH CODE SECTIONS 48-2c-710(3) AND 48-2c-809(1)

¶ 14 Duke and Cardenas first assert that the arbitrator exceeded his authority by ordering remedies precluded by the Utah legislature in the LLC Act, specifically Utah Code sections 48-2c-710(3) and 48-2c-809(1). Utah Code section 48-2c-710 describes the methods by which a member may be expelled from an LLC. It provides:

A member of a company may be expelled:

(1) as provided in the company's operating agreement;

(2) by unanimous vote of the other members if it is unlawful to carry on the company's business with the member; or

(3) on application by the company or another member, by judicial determination that the member:

(a) has engaged in wrongful conduct that adversely and materially affected the company's business;

(b) has willfully or persistently committed a material breach of the articles of organization or operating agreement or of a duty owed to the company or to the other members under Section 48-2c-807; or

(c) has engaged in conduct relating to the company's business which makes it not reasonably practicable to carry on the business with the member.

Utah Code Ann. § 48-2c-710 (2002). Utah Code section 48-2c-809 governs judicial removal of managers of LLCs. It provides:

(1) The district court of the county in this state where a company's designated office is located, or if it has no designated office in this state, its registered office is located, may remove a manager of a manager-managed company in a proceeding commenced either by the company or by its members holding at least 25% of the interests in profits of the company if the court...