ECO Box Fabricators LLC v. Zweigle

• Decision Date: 24 September 2020
• Docket Number: No. 20190278-CA,20190278-CA
• Citation: 475 P.3d 146
• Parties: ECO BOX FABRICATORS LLC, Rodney A. Newman, Susan Martindale, and the Susan Martindale Living Trust, Appellees, v. Tory R. ZWEIGLE, Appellant.
• Court: Utah Court of Appeals

475 P.3d 146

ECO BOX FABRICATORS LLC, Rodney A. Newman, Susan Martindale, and the Susan Martindale Living Trust, Appellees,

v.Tory R. ZWEIGLE, Appellant.

No. 20190278-CA

Court of Appeals of Utah.

Filed September 24, 2020

J. Morgan Philpot, Murray, Attorney for Appellant

Heather M. Sneddon and Jared D. Scott, Salt Lake City, Attorneys for Appellees

Judge Diana Hagen authored this Opinion, in which Judges Michele M. Christiansen Forster and Jill M. Pohlman concurred.

Opinion

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 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, 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 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 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 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. ...